Once-dominant US retail chain Sears filed for bankruptcy earlier this month. This demise might have surprised some: As of early October, Sears still had 700 stores and 68,000 employees. Yet despite its size, Sears was not indestructible when faced with the growing digital wave that has taken over the market. In fact, in recent decades, an increasing number of firms have adopted business models based on digital strategies; Amazon is perhaps the best example. Clearly, this digital transformation entails mandates for new strategies that focus on new success factors. Yet what should this new approach entail? What business implications does this approach have? Finally, what should companies do (and avoid doing) when applying digital strategies?
The Digital Strategy
This digital wave has been fueled by the advent of the Internet and by the introduction of affordable digital devices – first personal computers and then smartphones. The Internet has emerged as a new bona fide channel for both B2C and B2B activities; information gathering, purchasing and sometimes even delivery can now be done online, reducing the need for brick-and-mortar stores and physical delivery. For instance, groceries can be ordered online for delivery, and music and travel tickets can be ordered and delivered online. More recently, the “click-and-collect” trend has emerged; in this mode, customers conduct information gathering and ordering online but collect their products at a physical store. As a result of the digital evolution, the power balance between market players can shift easily. This evolution has several strategic implications:
The supply chain is becoming simpler, thus considerably reducing costs. These savings are usually at least partially passed on to consumers through cheaper products or services.
Consumers are becoming better able to gather information, conduct research and compare offerings from several providers. This helps them to identify the products and services that best suit their needs.
Digital shopping is becoming faster and more convenient. Transactions can now be carried out and tracked – from anywhere, not just from home – via mobile devices.
Enabled by this increased speed, consumers’ cravings are shifting toward experiences and instant gratification.
Business Implications
Online retailers such as Amazon are replacing traditional players such as Sears in part because their DNA centers on capturing and making sense of as much data as possible. Thanks to this focus on data, digital companies can now offer personalized strategies vis-à-vis customers, thus helping these digital players have a greater impact than traditional players. Products can now be instantly tailored to customers. Business has come a long way since Henry Ford presented his old dictum, “You can have any car as long as it is black.”
In parallel, scale is becoming an even bigger advantage. Offline retailers cannot match the purchasing power of successful online marketplaces with their centralized warehouses. This effect is often compounded by the “network effects” – ways in which users derive value from a firm’s other users. For instance, improved recommendations, segmentation and customer reviews are network effects. In addition, online channels allow niche players to gain wider distribution than they would be able to afford via the traditional routes to market. Thus, the digital strategy favors very large companies and niche players but not midsize firms.
Finally, the arrival of the Internet as a new channel has led to the decoupling of information gathering, purchasing and delivery, thus leading to fascinating new customer journeys such as direct catering to consumers and the click-and-collect method. However, despite its many strengths, a solely-digital strategy is not a panacea, as demonstrated by Amazon purchasing Whole Foods, a brick-and-mortar business, for $13.7bn last year. With 70% of this amount accounted for by goodwill, this shows Amazon purchased Whole Foods largely for its intangible value as a preparatory move towards a stronger focus on grocery sales, both online and in-store.
With such a substantial reshuffling of the cards, no single strategy works for every firm. The entire gamut of retailers should continue into the future, with a mix of brick-and-mortar, click-and-collect and online home-delivery firms. One conclusion is certain, though: The status quo will not be a sustainable long-term strategy.
Some Managerial Fallacies
The digital business model has changed the marketing function. Thanks to granular data and new communication tools, firms’ communication has become more direct, allowing them to target individual customers instead of creating indiscriminate advertising campaigns using conventional media (print, TV, billboards etc.). However, effective digital marketing requires that specific target groups be clearly identified. From that perspective, having nearly real-time access to specific consumer data can offset the disadvantage of having a small customer base. Furthermore, digital messages can be sent and tweaked in real time, allowing for “A/B testing” in which two or more messages are iteratively tested in parallel. Through this method, marketing messages can be honed to focus on a specific segment. The Internet makes this adaptive learning possible through the confluence of three effects: very inexpensive digital advertising, real-time audience measurements and click-through rates and digital campaigns that can be updated within hours. These effects bring segmentation and target marketing to another level.
However, some tenets of traditional business still hold. An often-overlooked aspect of traditional business principles is that strategy means choice. A common mistake in the current environment is to try to target too many segments at once, thus causing unnecessary complexity and a waste of valuable resources and focus.
A second managerial mistake is to ignore the fundamentally different expectations of customers who come to a firm via digital marketing. Slow follow-ups, quality issues and inaccuracies in order-taking and inventory management can catch new customers off guard. Given the speed at which consumer feedback can propagate, viral PR disasters represent an increasing threat to firms.
A third typical problem relates to working capital, even when payments are made up front. Consumers expect instantaneous catering to their desires, which can put young companies between the hammer and the anvil: Their limited resources require them to be lean, but customers’ demand for speedy delivery often requires significant inventory. However, sufficient investor funding can alleviate this problem.
Conclusions
Given the exponential power of information technology, we expect that digital business models will disrupt or even replace traditional business models. This change has potential upsides for consumers and for some firms. However, it will also create some losers. Most producers who are not willing – or able – to apply digitalization will have to revert to niche markets. Because of short-term incentives, the resistance to change and the difficulty of “selling” such a strategy, most companies will seek to replicate past solutions in last-ditch attempts to counter this tsunami of digital change. In the end, many players who serve traditional roles in distribution chains will be losers. Indeed, the most likely losers are traditional brick-and-mortar retail stores ... such as Sears.
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