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Making a Profit in the Wake of Extreme Competition

State of the Industry

The largest company in the world, Wal-Mart, is now a player in the UK food retailing sector. Not just a bit player mind you but actually the whole owner of Asda. With the Wal-Mart/Asda entity comes Sainsbury, and Tesco. Additionally, the recent buyout of Safeway by Morrisons rounds out the top four players. From each company's corporate website, indicated below is each of these retailer's operational mantra along with corresponding approximate market share and store count:

These four firms control approximately 66% of the market of food in the UK with all other market players enjoying single-digit penetrations. The dry goods market is largely the same if not even more competitive. Ironically, most of the grocers also appear on the dry goods list due to the popular superstore format, creating a one-stop-shop for virtually any item, edible or otherwise, that you might wish to purchase.

Looking at the UK market is largely the same as examining the US market: the numbers likely look the same and a few of the names are even the same. The market place is no longer a localized phenomenon capable of being reported on in neighborhood weekly paper the market has no bounds.

With a no boundaries global approach, competition is often fierce and with large multinational firms wielding vast resources competing with entrenched national or regional companies, each of which faces the smaller local vendor who seeks only to defend his turf against the encroaching corporate armies.

Getting Ahead & Staying Ahead

In such a highly competitive field, there are a lot of things that a firm can do in order to differentiate itself from competition. Regardless of one's position in the retail pecking order, there are common concerns that face the management of any operation. Having the marketing mix correct is nearly at the top of the list that is, the 4p's: product, price, placement & promotion must be right. Hiring and retaining good employees in an age of comparatively low unemployment is also likely to be on the priority list of most managers as is various operational concerns such as logistics and replenishment. Capturing the various aspects of each of these answers is, in a word, a firm's strategy.

While possibly the most over utilized word in business, strategy means different things to different people. Even more interesting, most define strategy one way and use it in another (Mintzberg, 1989, p. 27). For example, when asked to define it, most indicate that a strategy is what you intend to do yet when asked what a strategy is, they will speak about what a firm has done.

With this in mind, there are a number of different perspectives on applying a strategy that academics and practitioners have utilized that can be categorized, in general, according to five different schemas, each represented by a P:

• Plan - Seeing strategy as a plan indicating a guiding direction for a future action or intended course.
• Pattern - Interpreting a strategy from the view that it is what a firm has consistently done, regardless of intent.
• Perspective - This take on strategy indicates that it is largely equivalent to culture it's the way we do things.
• Position - Similar to military strategy, this view looks at strategy from the view that it can be designed and analyzed and that the content of the strategy is relevant.
• Ploy - The viewing that strategy is utilizing specific tactics rather than a broad or mile-high view of a firm's direction or orientation (Mintzberg, Ahlstrand & Lampel 1998, pp. 9-16).

The key to achieving market success, regardless of the size of the company, is in viewing the firm's strategy in a way that fully captures the strategy that an organization is best-suited to execute, viewing their firm's strategy not just as what was done or what they seek to do but rather as a coherent continuum of action.

It's Really Just Four Things

Capturing this continuum of retail success, Canadian researchers Stevenson, Schlesinger and Pearce express this continuum view by noting that a retailer's success can largely be attributed to four broad factors:

• A customer-driven, Retail Value Proposition (RVP),
• Leading geographic markets, categories or channels,
• Superior execution,
• Leading change (Stevenson, Schlesinger, & Pearce 1999, p.3).

A Retail Value Proposition is very similar to Porter's enduring model of the three generic strategies that any firm, if it is to be successful, must pursue. Two of the generic strategies which are somewhat opposed to one another are cost leadership and differentiation. This seems reasonable as it would be quite difficult to simultaneously be the low-price leader and driving the market through product innovation. The third generic strategy that Porter proposes is that of focus, sometimes expressed as 'customer intimacy' and is simply delivering value to a niche or specialized market (Porter 1980, p. 35). Porter's framework, indicated that a firm's strategy should really be based upon the industry marketing structure, dictated that a firm must choose how they should go to market. As such, straddling the 'strategic fence' is a recipe for mediocrity and will invite competition if the field is not highly competitive already.

A Retail-Value Proposition, in the same vein, is how a firm 'goes to market' yet is not based upon the industry or market competitive structure but is customer-driven. While many companies use the verbiage of being customer-driven and can identify their largest, or even better, most profitable segment as being female with $45,000+ income, consider the firm that can describe this same customer as being:

Convenience-oriented, largely price-insensitive, and service-focused who want full shelves, empty checkout lines and prices within 12% of the lowest price competition (Stevenson, Schlesinger, & Pearce 1999, pp.31-32).

The firm that knows, really knows their customer is in possession of actionable information that will impact everything from the fundamental marketing mix to the physical location of the store.

The customer-driven approach cannot be overemphasized. This point can be reiterated by also illustrating that a retailer's largest volume of customers may not be it's most profitable segment base. The addition of this caveat to the segmentation approach can yield significant actionable insight to a retailer's strategy (intent and philosophy!). For example, a Canadian clothing retailer discovered that 22% of it's customers delivered 76% of the revenue. These shoppers focused on selection, specifically, they focused on the breadth of the assortment and not the depth (Stevenson, Schlesinger, & Pearce 1999, pp.32-33). Missing the boat on this connotative nuance would have been quite costly to this retailer, thus the focus on what the consumer values is the basis for the retail value proposition.

In total, the retail value proposition is the promise of a retailer to deliver value. This value is delivered via the selection of goods, the total store experience from the customer's perspective, the pricing structure as well as convenience and other factors (Stevenson, Schlesinger, & Pearce 1999, pp. 15-16). The effectiveness with which the proposition is communicated and implemented is directly correlated to the success of the firm.

Leading markets, categories and channels is the second 'key' to achieve retail success. While it may seem obvious that if a firm is such a market share leader, it will be profitable, the lesson is in the case that one is not a leader. Some product categories such as automobiles dictate a geographic competitive field that is defined almost globally (Stevenson, Schlesinger, & Pearce 1999, p. 97). Other categories, including food, clothing or especially service-driven operations are defined much more locally. Even in the presence of a competitive field in a product or service category that is similar, it is possible to profitably co-exist with the retail giants of the world by knowing that you are not competing against them but for a certain customer, who exhibits certain characteristics with specific needs that you are ideally positioned to deliver.

As determined earlier, the word strategy means different things to different audiences. To a great many, strategy is simply what you do. Indeed, when considering strategy from an operational perspective, this definition hits upon the third element necessary for retailing success: execution. Execution is more that what it is perhaps more importantly how something is done. Such a process- and results-driven perspective is essential in determining operational success, especially in the areas of people, technology and cost-control (Stevenson, Schlesinger, & Pearce 1999, p.3).

Execution is these key areas is about more that doing the right things it is about process, that is doing things right (Stevenson, Schlesinger, & Pearce 1999, p.115). It is important to note that, for the most part, things get done through people. Whether it is people pushing a button or people interacting with customers and staff, people are often the common denominator in every transaction. Though literally thousands of books have been written on managing people, a common perspective is that people are an investment. While this is good talk, it often does not seem to make it past the lecture hall into the board room or the human resource office. Far too often, even in very good companies and perhaps sometimes unconsciously, people show up as expenses. While people do incur expenses, people should not be viewed as expenses, rather, they should be considered as investments in much the same way one would ordinary capital investments. Such a paradigm shift can give the needed perspective that they are important, should be viewed in the long-term, need periodic maintenance and should be chosen carefully.

Technology is the second component of execution and should be viewed as an enabling device. Specifically, in the most successful retailers, technology serves the following functions:

• Managing merchandise selection, store planning and inventory control,
• Utilize customer databases to know and market to the most profitable segments,
• Leverage technology to make major changes such as enterprise management or e-commerce transitions (Stevenson, Schlesinger, & Pearce 1999, p.144).

Unless a retailer is selling technology, information management services should be viewed only as an enabler and support of the retail value proposition. Getting the most return on technology investments is a combination of how it is utilized as well as what what is done. Utilized successfully, modern databases can help a company quickly sort through masses of data to discern what is truly useful and relevant. Utilized unsuccessfully, modern databases can quickly bog you down with literally millions of unactionable, routine data points that represents a disproportionate amount of staff time used only to report a 30,000 foot fact such as sales are up. Rather imagine the implications of having product and category data for year-over-year, month-over-month sales for stores and store groups along with pricing and inventory variances. Such information can enable retailers to quickly discover what works and adapt on the fly to shifting consumer demand, consistently planning the right product at the right location in the correct quantities at a price that will produces a mutual value to both the customer and the retailer.

Thirdly, no discussion of execution would be complete without mention of controlling costs. Though seemingly unrelated, a key precept of 'category management' is quite relevant. In this discipline, the overall focus is anecdotally, to manage the pie not the slice. By this, it is meant that a particularly vendor or retailer can often attempt to maximize their short-term gain at the expense of the far greater long term relationship and the profits that result. Costs should be managed the same way. It is possible to minimize any particularly costs today but, unless carefully considered, the implications could be that costs tomorrow are double. As an obvious example of counter-productive goals, holding costs could be minimized with the wider use of overnight deliveries yielding the initial desired results of lowering inventory but only at a far greater supply chain expense.

The 'final factor' that can differentiate successful retailers from the average and less-than-average competitive field is the fact that leading retailers are not static. They have a fundamental understanding that what works today may not work as well tomorrow. One of the dominant paradigms in strategy execution has been the introduction of the core competency by Prahalad and Hamel (Mintzberg, Ahlstrand & Lampel 1998, pp. 217-218). The idea of the core competency is that it is important for a firm to stick to it's knitting, that is, to know what it is and what it is not and to not attempt to do something that it has no business doing. Perhaps the most salient point in this construct is the ability to be able to differentiate what a company does from how it does it. Consider the example of General Electric who makes jet engines, light bulbs, medical devices and provides financial services. Their competency is widely reputed to be managerial and manufacturing excellence, not restricted to a sole product or service. In the same way, utilizing a non-profit example, the YMCA seeks to build people, sometimes using basketballs, sometimes using board rooms or bible study or even a swimming pool: what you do must be separated from how it is done. Using the core competency perspective, how is very much subject to change.

Start with the Customer End with the Customer

The answer is the customer.

The question is, how can a retailer effectively differentiate themselves as a retailer in light of the highly competitive field that exists in this industry?

Of course, nothing is ever that simply yet research and, in large measure, common sense, bears out that delivering value to the customer merits getting paid. By identifying the value the customer desires, who that customer is and devising a system to move provide this value in a cost-effective means, a retailer has the ingredients for a profitable venture. Reducible to the steps of delivering goods with the goal of leading the market whether defined geographically or by product category or by channel, the retailer then should focus on superior execution and avoid the trap of becoming obsessed with how the objective is being achieved over the objective itself, delivering value to the customer.

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