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Part 5: Exploding the World of Retail Opportunity - Preparing for Change

This is the last of a five part series.

Read: Part 1 - It’s Time to Have a Crisis
Read: Part 2 - Follow the Product Home
Read: Part 3 - Individualized Value with Smarter Big Data
Read: Part 4 - Create the Responsive Supply Chain

Leaving the conventional idea of a store behind, completely escaping the retail box, is an invigorating adventure. Yet, it’s an adventure that most retail organizations are ill prepared to undertake. Dramatically reimagining strategic possibilities requires being able to consistently deliver innovations that disrupt the status quo. Retailers must retool their organizations to support this task and in this installment we explore the stages leaders see on the journey to create a responsive Lean Enterprise capable of market disruption. Completely changing the model of what it means to be a retailer is the fourth and final option for escaping the retail box.

How Much Disruption?

While there have always been periods of disruption in retail, day to day business has been dominated by efforts to adopt the latest best practices at scale. The stable backdrop of the retail crate provided leading retailers with a shared checklist of things to master. Suppliers of the latest merchandising, supply chain, and customer engagement solutions showcased them at large trade shows where mass audiences would all be exposed to the same “best practices”.

Adopting these best practices is neither easy nor innovative. They are focused on making existing systems incrementally more efficient or effective. Even though the concepts have been well chewed over and codified, the systems are expensive and time-consuming to implement. This hard work of optimizing the status quo often leaves little room for the creative and new (figure 1).  Disruptive thinking and investment is done on the margins, if it is done at all.   ​

Current state of retailIn contrast, when retailers choose to compete outside the traditional retail model (figure 2) they are not focused on looking inward to modify current processes and systems. Rather, they look outside their own walls to disrupt the lives of their customers in creative ways. Their best opportunities are likely to be untested, requiring imaginative exploration. Optimization of known and well understood capabilities necessarily takes a back seat as creative disruption becomes the retailer’s key skill.

​​Retail key skill

Creative Maturity Level 1: Good at Doing the Predictable Better​

Most retailers operate inside stable long-established business models and are very good at doing predictable things better. They leverage the fact that they have a stable set of business rules, to make plans that can be followed.

Well-defined functional siloes focus on improving elements of their own processes, often without the holistic view that might lead to exponentially better solutions. Merchandising, supply chain, marketing and store operations teams make incremental changes without a full understanding of the up and downstream effects, or without clarity on what customers want or need.

They revisit strategies annually and (usually) support investments with very specific business cases. This means that investments are usually tied to solutions that enhance existing processes or optimize embedded technology. Project performance is measured in terms of compliance to specifications with the “Iron Triangle” of scope, time, and budget. Often individual departments’ performance is viewed in isolation regardless of how its impact may enhance or degrade performance in other areas.

Business as usual - doing the predictable wellStaying within budget, rather than creating new market value is the measure of success within the organization. This is not a model that promotes ongoing learning or transformative change.

Stable markets, where all players are making only small incremental moves, make it possible to exchange creative opportunism for the comfort of predictability. But today’s market dynamics are anything but stable.

Creative Maturity Level 2: Team Based Learning Loops

In contrast, when retailers operate outside well-understood business models, they uncover opportunities in previously lightly-explored areas of innovation. They begin to think about commerce, supply and merchandising in completely new ways. They challenge assumptions about the role they play in their customers’ lives.

This demands a big change in thinking, a fundamental shift in the way that leaders view and manage business risk. Retailers need a management model that can:

  • Actively Respond to Change: Leverage imperfect knowledge. Constantly look for new insights and pivot efforts to follow emergent opportunities and deflect newly discovered risks.
  • ​​​Pursue Unique Opportunity: Prioritize efforts to differentiate in a sea of creative competitors. Focus management efforts around identifying and pursuing opportunities, not just completing work.
  • ​​Create Quickly: Quickly take action on complex new opportunities. Internalize the need for urgency. Do hard creative things quickly. 

Traditionally siloed and hierarchical structures cannot explore and respond to opportunities in this way.

Fortunately there is a proven alternative that lets retailers respond in completely new ways. Over the last 15 years, “agile” technology and design teams have been mastering the use Learning Loops to enable nimbleness.  

The principle is the same any of us would use to navigate a new environment: develop a starting hypothesis based on limited knowledge, and run a small experiment to test it out.  With new insights in hand, adjustments can be made and the learning loop repeats. This is a powerful model for dealing with changing customer expectations, rapid technological shifts and the uncertainty they engender.

Agile methodologies have been widely deployed within IT organizations and within their partner delivery organizations, such as user experience design teams. They are on the ground, learning consistently throughout development.

This allows them to see and fix errors that are within their span of control. However, it is common for these learning based teams to sit like an oasis of learning in an organization that is frozen into functional siloes.

Creative Maturity Level 3: End to End Innovation Labs

Creative oases are easily disempowered.  An organization’s resistance to change is often strongest among the middle managers charged with overseeing the traditional operating models. This frozen middle of the business hierarchy holds power over strategy, budget and the final declaration of success or failure. In traditional organizational hierarchies it is easy to attack change agents because the projected benefits of new ideas are hard to quantify, delivery plans are tentative and incomplete, and there will inevitably be failures along the way.  

Recognizing this challenge from within their own organization, executive leaders intent on disrupting their business model often launch separate Innovation Labs (figure 5).  These mini organizations within the organization have control over the end-to-end innovation lifecycle, from budgeting through actual hands on testing with customers. They allow everyone who is safe inside the confines of the lab’s walls to live the mantras of “fail fast” and “learn quickly”.

Retail Innovation Labs have been powerful tools for building brands associated with creative retailing. Nordstrom’s videos of innovation teams working right in the store with customers to improve their shopping experience are genuinely inspiring and have spawned many imitators. Labs have proven to be great sources for articles in Wired and the Wall Street Journal.

Unfortunately, innovation labs’ independence often creates an insular separation from the rest of the organization. Pilot programs proliferate like baby bunnies, and some may have great potential. However, teams pushing new ideas developed within the labs, even those that show great promise, face major challenges when they try to take their disruptive ideas to scale.

Creative Maturity Level 4: Responsive Lean Enterprise

Ultimately, creative disruption can’t sit in isolation. The organization as a whole must create a capacity to explore, shape and deploy untested disruptive ideas. The entire organization must be capable of responding to a dynamic, hyper-creative marketplace.  

This is a big demand, but there is hope in the same models that have empowered teams on a smaller scale. Learning loops can be leveraged by executive teams, teams on the shop floor, the program management office and even management’s frozen middle. For the retail enterprise to break through the safe confines of best practices, they all must be drawn into a dynamic partnership with the creatively empowered teams.  

The application of learning loops to the entire enterprise is a relatively recent development. This shift isn’t easy, but it opens the door to bold disruptive action outside the retail box. Consider a combination of disruptive ideas from earlier parts of this series. Imagine an enterprise building customized personal supply chains for their customers, extending the farm to table concept into people’s daily lives. They would need to leverage big data insights, dramatically expand supplier relationships, establish new flexible store independent distribution models, and engage customer in the context of their daily life.​

Old divisions that built silos between business and technology should be blurred or lost altogether. The fundamental culture shifts too, from doing a good job at the same thing that the organization has always done, to one of shaping complex new forms of value.

Such a model has allowed retail startups like Story and B8ta to completely rethink the traditional rules of retail. Their approaches to merchandising, procurement and commerce are unconstrained by conventional retail thinking and supported by organizational and technological platforms designed for innovation. As more retailers begin to focus more on an outside-in approach to service delivery, starting with a deeper understanding of how and why customers behave and building retail solutions around them, they will need to position themselves for continuous innovation with learning loops. ​

Executive Vision is communicated based on opportunities and business outcomes.  It guides (but doesn’t dictate) other’s creative actions.
Budgeting and Portfolio Management is an ongoing activity driven by market feedback
Empowered Creative Teams no longer work within an oasis. They are organized around opportunities, iteratively learning as they build and pivot based on insights.
Business Outcomes determine success. Instead of locking down fixed outputs, ideas are tested in the market, with feedback into short loops of investment.

A Final Wrap Up – Expanding the Field of Opportunity​

The opportunities within the retail crate, that box that retailers put products in and where customers come to buy, are increasingly commoditized and subject to ever more tenacious forms of competition. It’s a hard place to survive, and many who cling to that model will struggle to retain customers and profits.

The Retail Box is not a safe space. Not only is there blistering competition from others inside the box, there is also an explosion of disruptive new strategies from those who escaped, treating the old retail store model as irrelevant. ​

Getting better at a losing game is not a smart strategy. Escaping the boundaries of the store changes the story. The field of opportunity becomes the customer’s entire life. Powerful new technologies like IoT, Big Data, and the Cloud, multiply the possibilities for creativity.​

Disruption is not just a threat, it is an opportunity. There is nothing easy about being the retailer that thinks and acts differently from retailers of the past, but that path leads to a future filled with promise. There’s a big new world outside the box. We should all be playing in it.

Disclaimer: The statements and opinions expressed in this article are those of the author(s) and do not necessarily reflect the positions of Thoughtworks.

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