Chapter 14 Reframing Retail Strategy

1. Chapter 14 Reframing Retail Strategy

2. Reframing Retail Strategy • Major drawback of traditional retail thought… • Retailing ≈ Merchandising ≈ Goods (Tangible Offerings) • One “constant” of retail success: • Improvement in “choice” increases customer satisfaction • Eg, East Germans’ “choice” enhancement after the Berlin Wall Fell 1989 • Satisfaction drives repeat purchasing, and thus profitability

3. Three Eras of Retailing • Timing is idiosyncratic with regards to country and culture • Some are still in era one • Going to market ~ “To Market” • Generally prior to 1900 • “Marketing to” customers • Generally after 1900 • “Marketing with” customers • Last couple of decades, yet degree of use is limited

4. “To Market” • Retail success largely seen as resulting from: • Distribution, and • e.g., Plentiful and timely supplies • Inventory management • e.g., Fully stocked shelves of new merchandise • Largely why retail was synonymous with “the city” • Limited transportation/travel and communication infrastructure limited assortment capabilities • i.e., the 3 major constraining factors on retail at the time • e.g., Macy’s (NY) included apparel factory to supply rather than rely on a supply chain – even in New York city which was “large” at time

5. “Marketing To” • Many transportation & communication constraints alleviated with 20th century • Paired with retailer success, many leveraged infrastructure enhancements and began replicating via chain stores • But chain operations brought own set of issues • Large capital investments & concurrent success of many dominant department stores pushed chains to focus on lower prices and promotion of these lower prices • Lower price means more transactions in order to maintain profit levels. • Retailing becomes more about efficiency & selling than service & uniquely solving customer needs

6. “Marketing To” (cont.) • The “earn & turn” mass merchandising formula: • Function of three (3) tasks: • Locate in low-cost areas to minimize operating costs • Focus on high-turnover goods backed with low price & promotion • Shift work to the customer ~ self-service lessens employees • In essence, the “Retail Resource Trinity” Model

7. Retail Resource Trinity Model

8. “Marketing To”Creates an Efficiency Trap • Mass merchandising leads to an “efficiency trap” • In trying to be attractive to all, it’s ideal for no one… • So where’s the retailer’s differential advantage? • The trinity-model is easy to copy • Constantly seeking to improve profitability requires constant improvement in: • Retail space productivity • Retail inventory productivity • Retail labor productivity • Resource efficiency becomes the goal over resource effectiveness as price becomes the deciding factor • i.e., The Retail Resource Efficiency Cycle

9. The Retail Resource Efficiency Cycle

10. “Marketing With” • Represents a significant shift in retail management thinking & strategy creation • Two major areas of change • A shift in the way retailers view and manage firm resources • An era of active collaboration & long-term relationships between retailers, suppliers, customers, & other stakeholders (employees)

11. “Marketing With”& Resource Management • Operand versus Operant Resources • Operand – those that humans act upon or do something to in order to create an effect • By very nature can be exhausted or depleted • Eg, natural resources, equipment, fixtures, merchandise, etc. • Operant – those that can act on or produce effects • Rather than being depleted can be grown or expanded • Often intangible, yet the reason why harder for others to copy • Eg, employee skills, competences (knowledge), capabilities, etc • One proxy – price to book ratio • 5.08 ratio = $4.08 generated in intangible for every $1 in tangible

12. “Marketing With”& Long-term Relationships • From “One-to-Many”… • “Classical” marketing (i.e., Marketing To) • Viewed all stakeholders as essentially operand resources • Extract as many concessions/benefits from prior to depletion in most efficient manner possible • Common examples of one-to-many marketing include: • Broadcast media, • Employee manuals, • Standardized procedures for all employees & suppliers • Taken to the limit one will run out of suppliers, customers, employees as all are seen as exhaustible

13. “Marketing With”& Long-term Relationships • To “Many-to-Many”… • “Service-Dominant-Logic” marketing (i.e., Marketing With) • Recognizes that all stakeholders can be proactive, both positively & negatively, in affecting retailer success (i.e., operant resources) • Views customers, and more broadly all the retailer’s stakeholders, as central to the retailer’s long-term success • The remaining marketing- and retail-mix variables are only important to the extent that they help to better meet needs/wants of stakeholders • Recognition spurred largely via the presence of many-to-many communication networks (e.g., Twitter, Facebook, etc.)

14. A Service-Dominant (SD)Logic or Mindset • Service is the cornerstone of SD Logic & corresponds to: • The application of knowledge & skills, through deeds, processes, & performances, for the benefit of another. • Thus, service involves • Doing something of benefit for others (i.e., stakeholders) • Interaction because deeds, processes, etc. aren’t done in isolation • Application of knowledge & skills that are unique, operant resources which establish the basis for one’s differential advantage • Service is not simply the opposite of a tangible good; it’s the reason for the good in the first place

15. Three Forms of Service • Service as a Transcending Concept • Service can be provided in three (3) primary forms: • Directly (most common view) • Indirectly Via a Good • Goods have a job they perform (i.e., help you perform a job) • Thus, all goods are service appliances that create solutions • What are you buying when you purchase a drill bit? A toaster? • Via Education • Education & demonstration enables the customer to better use and experience the product purchased • Cooking demonstrations at Williams-Sonoma enhance ability to use cookware at home.

16. IHIP Characteristics & SD Logic • Traditional-services marketing • Views services as distinct from goods & in possession of less desirable characteristics • IHIP: • Intangible, heterogeneous, inseparable, & perishable • SD Logic adopts perspective that all market offerings should strive to have & highlight IHIP characteristics • What are you buying when you buy… • A BMW automobile (a good), or • Jewelry from Tiffany’s (a store) • Brands etc. are IHIP, else they’d be commodities

17. The “Traditional” vs. SD Logic Perspective Traditional Services Mktg. SD Logic Goods are also IHIP: Heterogeneous from the customer’s perspective b/c each uses & experiences differently & uniquely Inseparable b/c there’s no value until they are used, and in use, one co-creates value with the producer simultaneously EG – An iPad’s value is Apple’s service provided when you use so location is separate, but not the service provision Perishable b/c of obsolescence, recycling, sharing, etc. Services need not perish if viewed from the customer’s experience Education doesn’t perish (hopefully) • Services are: • Heterogeneous b/c each customer receives something different • Inseparable b/c they are provided & consumed simultaneously • Perishable b/c they can’t be inventoried • Goods are: • Homogenous b/c standardized • Separable b/c produced away from customer in factory • Nonperishable b/c they can be inventoried

18. 4 Principles of SD Logic • Service is the basis of exchange • What is exchanged in the fish & wheat example? • Not a good or output, but processes and skills • People are always co-creators of value • Just like the kitchen appliance (i.e., used to create value), all goods are used to create some type of value • All people are resource integrators • Customers integrate market resources, often from several retailers, with public & private in order to create an experience • Each person determines value uniquely • Everyone experiences products in use differently, & even families will each experience a shopping occasion differently

19. Customer-Centric Retailing • Most marketing & retail decision-making “puts the customer first,” but… • Customer-centricity goes to the extreme • The customer & his/her daily life informs all firm decisions • Thus, the goal is to enhance density • The best combination of resources that are mobilized to a time & place for a particular individual to solve one’s problems or enable one to pursue opportunities at an optimal value or cost. • e.g., Google, Amazon, The Coca-Cola Freestyle Vending Machine, etc. • The “Customer-Consultant” or “Buying Agent” • Greatest opportunity for the future of retail is becoming an advisor of density and integrator of resources.

20. The Customer as an Operant Resource

21. Engagement • The degree to which customers interface, experience, & connect with various actors (retailers, etc.) in the economic system • Interfacing • Corresponds to every interaction between the customer and retailer • Goal is to make each as pleasurable & easy as possible • Experiencing • The cognitive & affective responses resulting from interfacing • Goal is to understand how every interaction leads to a pleasurable experience • Connecting • The degree of bond that a customer has as a result of one’s interfacing and experiencing with a particular retailer.

22. Co-Production & Co-Creation • Customers actively participate in creating value • Two avenues for actively producing value: • Co-production • A continuum pertaining to the degree to which the customer is actively involved in the performance of the retailer’s core activities • e.g., from entirely self-service (including checkout) at the highest extreme to personal shopping, etc. at the other • Important to note that there will always be some degree of co-production, but it might be quite minimal* • Co-creation • Everyone who purchasesoruses a product* is a co-creator of value • Value is the knowledge, skills, etc. imbued in a product & experienced in use • Co-creation is at the heart of what value truly is received.

23. Relieving & Enabling • Value stems from not only co-production and co-creation, but also the degree to which individuals are relieved and/or enabled via a product* • Relieving • The degree to which other tools, people, informational aids, etc. assist in eliminating certain tasks or making them easier • Enabling • The degree to which other tools, people, etc. assist one in the performance of service for themselves or others that they would otherwise be unable to perform • e.g., One-stop shopping, in-store banking, cooking demonstrations etc

24. Dialogue • Customer-centricity views advertising and promotion as a service and tool for building and maintaining relationships – not a means to sell • Dialogue marketing involves learning together • Requires • Openness & a sharing/assisting mentality in communications • Active involvement in the community one’s seeking to reach • Common examples include • Externally • Social media networks and blogs • Internally • Social networking and other collaborative tools for not only employees but also suppliers

25. Value Propositions • Again, • A statement of the tangible and/or intangible results one receives from shopping at & using the retailer’s products* • Forget the “holy grail” of price & economic value • Understand “value” from the customers’ perspective (in use) • How do they use your products to create value? • What other products (resources) do they integrate with yours to create value? • What are the total costs (not necessarily financial – e.g., time, social, etc.) to the customer in using your products? • How does the value proposition resonate with your other stakeholders (e.g., are employees excited about uniquely serving the customer)?

26. Developing a Learning Mindset • Failure isn’t always a bad thing • Often believed to be a “control” issue • Management/employee control need not be “lacking” • “Sticking to the plan” could be to blame • Failure offers learning & enhancement opportunities • Three Different Types of Learning: • Single-Loop Learning • Double-Loop Learning • Triple-Loop Learning

27. Single-Loop Learning • Learning via a single source of feedback • In the context of a management plan: • “Learning” through corrective action which is triggered whenever the retailer recognizes it’s performing below some pre-established target goal. • SPM example: • If ROA target is set at 16% but current operations are yielding a ROA of 10% and PM of 4%, corrective action is needed. • What’s the easiest corrective action? • Boost one’s AT from 2.5 to 4 (see Ch. 2 on how both numbers were determined*) • But recall how doing so could boost “stock-outs” (our “Stock-Out” math problem*)

28. Double-Loop Learning • Learning via a double source of feedback • In the context of a management plan: • Learning through introspection wherein the retailer elicits feedback on not only whether it is meeting targeted goals, but also if the goals/measures it has chosen to go after are the appropriate, or “right,” ones in the first place. • SPM example: • Recall our “what is profit” discussion… • Just like profit figures need context (e.g., from sales of what? ~ PM), • Determining what metrics to go after need careful thought • Is focusing on margins (e.g., PM) instead of simply dollar figures good enough, or • Perhaps one should use ROA, which includes more of an efficiency component, but • Could too much attention to ROA push one to “gamble” by playing with AT, …

29. Triple-Loop Learning • Learning via questioning the appropriateness of the current business model & reframing • Unlike in single- and double-loop learning, the retailer asks not only • “are we doing things right” (i.e., single-loop), and • “are we doing the right things” (i.e., double-loop), • But also • “what is the right business model ” • Triple-loop learning underscores the idea of reframing • Consider future changes in form, time, place, & possession • With constant attention to one’s value proposition and why customers choose to shop one’s store

30. What You Should Have Learned…Chapter’s Learning Objectives • Describe the three eras of retailing and what distinguishes them. • Define service according to a service-dominant logic and explain the four principles of service-dominant logic. • Explain how customer centricity is essential in contemporary retailing. • Discuss the central importance and imperative of continuous learning in retailing.