CLASH OF TITANS…Who will turn out to be INEXORABLE in Phygital Retailing [Digital + Physical] world? — Part 2
Let us look at how it got here?
As I started thinking about a few points, on who is inexorable… in the past couple of weeks since I have posted the Part 1 of this article, there are quite a few interesting news that I found which are of interest to read in this context, before I kind of lay out my thoughts on who will turn out to be inexorable?
Walmart to Add 2,000 Tech Hires in Battle With Amazon for Market Share
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I will try and connect all the above news into the context of what am laying out as my thought process from a strategy that makes a particular one inexorable. Also what I found interesting this week, #NRF is going, on and key topics are #digitaltransformation, #disruptingmodels, #operationalimpact, #o2ocommerce, #phygital.
So enough of the news and let me tee-off with something that history has shown time & again in the case of “long-running corporations” — of course, the question about ‘how long?’ Let us take a quick walk through of once the top retailer Sears, and how it yielded its position to Walmart and then later on Walmart to Amazon. Sears was indeed #1 retailer till October of 1989, when it conceded its position to Walmart.
When Walmart took over the unprecedented leadership that Sears had, Amazon was not even existent, and internet was not mainstream. Though there are so many other pictures that indicate the position of Walmart during 1990 till about 2015 — I like this picture it points to Amazon getting into top 10, while Walmart is still #1, whereas Sears dropped off the top 10 list.
The picture below is again an interesting one, while most of the 2012 top retailers are there, one goes off the list — ‘Safeway’ and Target’s position is taken over by Amazon growing from $34Bn to $102Bn approx. This is by far beating growth rates every single retailer.
Questions to be asked?
Looking at all the above, there are a few serious questions that need to be asked, what did Walmart do to take over Sears position, and what did Amazon do to step into the position what it has… of course, both Walmart and Amazon had their advantages, strengths, strategies they brought to the board. However, there are few questions that arise
· What has blindsided Sears?
· What did Sears do after they realized that Walmart was dominating retailing with their EDLP (everyday low prices) and EDLC (everyday low cost)?
· Given that Walmart took over the top spot from Sears, what kind of defensive mechanisms did Walmart put in place to compete and retain the position?
· Why did not Walmart look at Amazon and adapt to their internet-based marketplace selling model earlier?
· How is Walmart devising their strategy to combat Amazon?
· How is Amazon devising their strategy to win over Walmart?
“STANCE-ACE “— A Strategic Framework for enterprise transformation
As I kept taking my son to his Golf lessons — the coach kept on insisting STANCE to ACE the game, on listening to it few times, it appeared that STANCE is an important aspect mainly the way to think, position, being aware of the terrain, calculating based on context and then taking a swing. In some sense, even for the enterprises all of the above are important to stay & ace in the game.
This is a framework (solely emerged of my own thought process to narrate the aspects to consider while analyzing in the context of enterprise digital transformation — developed by Bharath Yadla) to view enterprise strategies, specifically in the context of disruptions — whether being disrupted or being a disruptor. There are two sets of elements in the framework — STANCE focused on what the organization is made of and ACE is focused on how the organization plays the disruption game.
Strategy. Be it either a defensive strategy (if an established player)or offensive strategy (upcoming player). How does one secure a leadership position — be it cost or differentiation leadership? Specifically in the context of Phygital transformation, how is the combination of these strategies devised and executed. This is also critical, on how well the enterprise’s organizational structure is devised to embrace the strategy that is laid out and carried forward.
Technology. Every enterprise is a technology enterprise with Digitalization driving transformations. How does an enterprise embrace the technology and continuously adapt to either innovate or enhance the efficiencies? Moreso whether the technology stacks that have been instated by an enterprise (if an established player) scale up to the internet dimensions in the context of customer experiences, business agility, optimized operations, new business models and innovation. In the case enterprises (upcoming players) whether the established competitive advantage with superior technology frameworks and stacks, is being eroded by established players with their investments in technology.
Adaptability. How an enterprise adapts determines the probability of survivability in constant change brought in by the digitalization. Enterprises which adapt to business challenges, customer expectations, supplier resource ability, employee expectations & performance, market adaptability, adapting to ever-changing technologies & embracing are the ones that thrive and rest fade out.
Natural Strength. This is what I call DNA of the organization. What are the roots based on which the organization has been built on — leveraging this DNA is very critical element in devising any strategy, for a strengthened offensive or defensive play. Usually, in the time of challenges, any organism goes through involuntarily to build the strengths on — like a mammal in fright reacts in a very different when compared to a reptile, likewise, any organization has its own DNA — however, the only difference in the organizations is that this DNA gets morphed as the organization evolves.
Culture. It is what defines the belief system that is built into the organization over a period of time — be it the way it conducts business, treats employees, treats partners and how shared values are embedded into the organization.
Execution Ability. It is another critical factor that determines the success of an organization in the context of transformation. How well an enterprise can execute and thrive is based on all the above mentioned -strategy, adaptability, DNA, culture, and technology specifically in the digital world.
Ambidexterity. In the digital world, specifically for established players, there is no such thing as “clean slate” they have to focus on keeping the existing business going for dominance, at the same time innovate and compete the potential future enterprises that are going to dominate in their industry. This puts any organization in a very precarious position, as to run on two different and widely divergent aspects of organizational growth. For precisely the same reasons, any organization needs to be driven as an “ambidextrous” organization that can carefully craft the balance between these two modes of performing. This focuses the organization to delve into both explorations (innovating & experimenting)& exploitation (taking leverage of the existing strengths).
The Ambidextrous Organization
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This also holds good for leadership as well, the leader needs to be able to step-up and step-down to foster both bottom-up and top-down approaches.
Customer Obsessiveness.The closer an enterprise is to its customers the better in the context of digitalization. “Zero distance” to customer demands the entire organization to be operating with “customer-obsessive” nature. Understanding customer expectations in real-time and matching to their needs are the key for best customer experience. Having and continuously honing this ability for an enterprise keeps it ahead of its competition.
Ecosystems. Given that digitalization drives different business models like Platform based business models, and platform business models thrive only on the strength of ecosystems in which the enterprise plays, it is very critical that enterprises develop ecosystems across the entire business value chain.
Amazon — A viewpoint
Amazon has seen tremendous growth in the past few years with internet commerce dominance. Before I present a point of view based on STANCE-ACE framework, the interview of Jeff Bezos below. This interview points out the customer obsessive nature of Amazon, technology powered innovation, fast-moving DNA etc.
There is one more point that I would like to bring out — in my view Amazon is actually 3 different businesses in itself: Retail, Media&Entertainment, Tech&Infrastructure. In fact, it is best explained by valuation guru — Aswath Damodaran in his valuation method, and it makes perfect sense. All of the 3 businesses are intertwined with commerce, prime subscription, aws cloud services — while commerce and prime subscription have an intersection of its consumer side of the platform, whereas commerce & aws cloud has an intersection of its merchants using aws cloud.
Strategy, Technology: If you look a little deeper into Amazon’s strategy is driven primarily by commerce & prime subscription. The prime subscription ensures the recurring revenue and repeat-orders, with 100+million prime subscribers though it is a great strategy to have a very low churn rate, keeping the shipping costs under the threshold is also very critical, given prime members are incentivized by free shipping. At the same time, leveraging technology to their competitive advantage — be it cloud, AI/ML-based solutions for efficient warehouse operations, dynamic pricing, propensity forecast of SKUs, delivery logistics optimization etc.
For sure, technology is Amazon’s greatest advantage, yet my view is it will be one of the key disadvantages for Amazon in the longer run- and here are my reasons: most of the listings of the catalog are dependent on ML driven, and these positions depend on the reviews/ratings and other data points collected/sourced from the crowds, this is one weak point that needs constant attention, and am sure that Amazon does deeper investments, but the issues will be how it will fight back the human wrongdoings like the ones mentioned in the article above (how scammers manipulate the ratings and reviews) this will be a major investment area for Amazon. At the same time, competition like Walmart, Target, etc are catching up with their technology as well — this will be a level playing field. Also, most of the commerce play is in emerging economies like China, India where there are players that are Non-Amazon like Alibaba, BigBasket, Flipkart, JD.com etc. This, in my opinion, will constrict the growth rates. At the same time, the prime subscription is dual-sided loyalty for shipments & entertainment. Given that Netflix and other players out pass the Amazon’s entertainment angle, this will start eroding the prime loyalty only towards
Adaptability, DNA, Culture, Execution: Amazon’s adaptability, DNA & Culture are its own strength-specifically JeffBezos innovative driven leadership, yet its own weakness. Let me explain why? Amazon has been a disrupter serially — be it eCommerce, building tech business out of what they build for themselves, monetization with longer LTV through prime. Its DNA and culture have evolved around innovating faster and running at speed of light — some of the businesses that emerged out of that high-speed innovation are the fire phone with no much success, and those are bound to happen in a very high paced innovation. In addition, the context of Phygital demands the need to focus on physical stores for commerce to grow and compete with someone like Walmart on their own turf. Given the way, their big acquisition with WholeFoods in 2017, took shape into, is not by in itself a decisive point, however, I would like to point that “culture clash” was the central aspect — this by far is an area that Amazon would need to embed into their strategy execution on the physical side, given that most of their physical growth can come only through inorganic expansions.
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Ambidexterity, Customer Obsessiveness, Ecosystems: Ambidexterity is way more fascinating for Amazon in my view, most of the times this aspect is brought in the context of age-old traditional enterprises trying to innovate themselves, however, I would like to highlight the equal need for ambidextrous nature for internet enterprises (which Digital Natives like AMZN), perhaps more. It is like learning about remembering the phone numbers for smartphone generation (the arguable aspect is why to remember a phone number when you can get it with a click of a button from smartphone…). In this case, it is more important for Amazon to be equally aggressive in physical store commerce to compete with players like Walmart.
Amazon’s zero distance to the customer is a great strength, at the same time an aspect of how those customers behave during their shopping in physical stores is an unknown area, part of the culture clash in case of WholeFoods is an expression of this aspect. As regards the ecosystems, Amazon’s ecosystems play a critical role in both commerce and technology infra businesses- in the case of the technology business, ecosystems play a lot bigger role mainly in the context of going to market. While Amazon has been developing a great set of partners in the area they also have been stepping on some of the partner’s businesses specifically open source solution providers. This only will erode the “ecosystems capital” over a period of time.
Net-Net, Amazon has by far great ability to be inexorable in the world of phygital, however, my views highlight some areas that need attention. Yet to be seen if it will overtake Walmart.
I am not that frequent shopper at Walmart, however, every time I have visited a Walmart store, have always been fascinated by how much operations go on in the background. Before I delve into Walmart and put down my views, I would like to present the evolution of Walmart and what each of the CEOs focused, and why that is a critical aspect to observe to understand Walmart’s strategy.
Strategy, Technology: Walmart’s singular focused strategy from the day one has been EDLP (Every day low price), saving money for its customers. This is what one sees in every store of Walmart.
A significant target customer base of Walmart has been middle-income family shoppers who can always depend and trust on Walmart’s low prices. This has significantly helped Walmart in honing their operations — merchandising, supply chain, warehouse logistics, store management, pricing optimization, vendor partnerships for economies of scale & economies of scope etc.
Doug McMillon’s strategy significantly expanded, when compared to the traditional strategy that Walmart was singularly focused on — EDLP & EDLC. His core strategies around acquiring new technology-driven commerce businesses like Jet.com has significantly turned Walmart into a “data-driven company” significantly competing with Amazon, though not yet on par in that aspect. However, the focus both on physical formats and eCommerce format has been shaping Walmart into something new that seems to give competition force in its own way to Amazon. Now it is all about EDLP any time, anywhere.
Walmart’s intense focus on technology in my view started with the acquisition of Kosmix (now Walmart Labs), this paved the connection between Bentonville to Silicon Valley. And today Walmart processes more than 2TB of data every hour, this is a step towards catching up with Amazon, yet too far from Amazon’s ability to analyze data in real time and drive business decisions.
Adaptability, DNA, Culture, Execution: This is the first step that Walmart has been open to adapt for the new world of commerce, unlike Sears that was slow in adaptability. Walmart’s DNA was born out of Sam Walton’s vision to be the lowest possible price for retail goods, strictly centered around EDLP. This drove every aspect of Walmart’s operations which in turn drove extremely efficient operations across the value chain. Walmart’s culture is strongly intertwined with their 2 million store associates and EDLP. While all of these play extreme strengths in the physical retailing arena, sticking to EDLP in eCommerce arena is a challenging aspect. At the same time, Walmart’s customer base is not the fast-growing younger and aspiring generations who are technology savvy. Thought Walmart’s adaptability could give a bit of push in combating Amazon, unless they expand into other segments who are affluent shoppers, it will prove more uphill battle in defending against the Amazon effects. This picture below provides how Walmart can create a new value curve based on “Blue ocean shift analysis”
Ambidexterity, Customer Obsessiveness, Ecosystems: Walmart has been developing into an ambidextrous organization under the leadership of Doug McMillon, while it is improvising and defending the ground on a physical format, it seems to have realized about the strategic nature of gaining digital abilities, and these have been through acquisitions. The way they have organized Walmart.com that is catering to both traditional Walmart customer segment but slowly catering to affluent segments as well through various online stores like Bonobos, MooseJaw etc. In addition, innovation is on hyperplane with their Store №8 where fostered innovation is carried out at an arm's length through corporate investments so that enough independence from traditional business plays a positive role in driving an ambidextrous organization. Here is a picture that depicts the innovation part of the ambidexterity — what happened in 2017
Walmart customer obsessiveness is reflected through the associate zero distance to customers. Walmart’s associates have strong & intimate knowledge about their customers, SKU propensities based on customer behaviors, etc. This is a significant advantage that Walmart has, but the question to be asked is how can that be integrated with the online commerce knowledge to shape itself into a stronger Phygital play than its competition.
Walmart has developed, honed and mastered the culture of developing ecosystems and it is second in nature for Walmart to find marriages & alliances in its ecosystem be it on the suppliers, partners, logistics providers etc.
Here is the picture that I have put down in November of 2017 of Walmart should do to enhance their ecosystem play to start playing offensive against Amazon (as a part of my strategy study) — glad some of them turned out to be a reality :-). That said, the success of these marriages & alliances is based on how Walmart culturally integrate into its mainstream business.
Net-Net, though Walmart is trying to transform itself like an ambidextrous enterprise, combating Digitally against Amazon would need far more acquisition of abilities on the technology front like — far more efficient hardware (cloud, metal & ops) infrastructure, a superior data foundation that outperforms Redshift+DynamoDB+RDS, a superior data platform that can process the data at the speed of wire for real-time business decisions, more additions to skillset (like the news mentioned in article above) etc. on the business front, more ecosystems like Flipkart will add power to offensive build out on digital front. However, on the Physical front, Walmart needs to constantly increase the ‘gap’ which Amazon will try and fill by acquisitions — as an example Target Corp.
Who is inexorable? — My take on it
Now the BIG question of “Who is inexorable?” — undoubtedly both Amazon and Walmart have their own strengths to be the one who will be unstoppable, that mentioned at the current point in time, it is tough to state out firmly whether it will be Amazon or Walmart.
That said, it is my view based on the strategic analysis using STANCE ACE framework, Walmart has a 51–49 chance of being inexorable in Phygital race. While Amazon clearly will be unstoppable if only Digital race is considered for a considerable period of time.
The views expressed in this post are solely mine and not anyway reflect either my current employer or past employers.
The analysis and views that have been brought to this post are based on my assimilated experience in the areas of Digital Transformation, Real-time business solutions, Relevance & Recommendation Engines, Personalization & Dynamic pricing, AI-based personal assistants, Data technologies for Banking, Retail, Mfg, O&G industries and what I have learned at IE Business School and continue to learn — Bharath Yadla