Commerce Transformation: Tackling Conflict Between Your Business Model And Operating Model
Legacy retail and consumer goods companies who continue to rely on their size, scope, and heritage to remain sustainable are doomed. Each must now reorient both business and operating models to be viable in the new consumer-centric, digitally-dominant marketplace. The shifting preferences of younger generations combined with increasing role of technology in consumers’ everyday life have elevated the influence of new entrants to the consumer goods and retail space. Failure to evolve as a participant in a new commerce reality where consumers to shop, buy, and receive on their terms will perpetuate the death spiral so many old world players are already undergoing.
Companies are now harnessing technical advances and cost reductions in computing, storage, wireless communications, and data availability to achieve capabilities at a scale not possible even 3–5 years ago. These capabilities — manifesting through innovation in mobility, data science, artificial intelligence, automation and cloud connectivity — are driving an evolution in how consumer goods and retailers present, sell and fulfill commercial transactions. This is requiring a re-imagination of core elements of legacy business models, and in many cases establishing an imperative for commerce transformation.
We know digital technology has become an indispensable part of everyday life, and has become a forcing mechanism on companies to transform the way they must connect with and create value for customers. It’s requiring us to rethink the traditional purchase funnel based on a deep understanding of customer needs, attitudes and beliefs, an examination of their decision paths, and the critical moments which unlock or destroy value within. Commerce transformation is fundamentally about reorienting the business to create more customers in the digital age, benefiting from the technology advances above. After all, a customer is only a customer when they buy from you — otherwise they’re a prospect at best and a poor investment at worst. When it comes to commerce transformation, failing to be a leader risks comprising competitiveness and future success.
THE NEW LANDSCAPE
Only 8.3% of US retail transactions (by dollar value) occur online, but it’s estimated that 56% are influenced by digital touchpoints. Mobile interactions represent two-thirds of that, influencing 37% of retail sales. Digital content, services, and information, wrapped in engaging user experiences, attack friction points across shoppers’ purchase decision journeys resulting in new feature sets and in some cases completely new and disruptive business models.
Consumers’ insatiable appetite for access, information and convenience are triggering this demand. According to Internet Retailer, subscription commerce alone (e.g. Trunk Club), has grown 3,000% in the past three years. Amazon and Wal-Mart shoppers now enjoy free shipping on orders over $35, and more than 66 million Amazon customers pay $99/year to get it (among other benefits) on all orders. Digital assistant platforms Alexa and Google Home both allow people to buy through their voice interface and, for Amazon, Alexa-driven sales are forecasted to represent $7 billion in revenue by 2020.
Department stores used to be the place where people created their wardrobe. Grocery stores helped inspire meals and festive occasions. Specialty stores let people explore unique items of self-expression or uncover a perfect gift. But legacy retailers are largely losing their grip on this role in discovery — “shopping” has been replaced by searching, “discovery” comes in a subscription box, and “inspiration” is the result of a pin or a like. Legacy is no longer enough to ensure sustained leadership.
As many consumers began to shift their spending to other channels — club stores, off-price stores, Amazon — legacy retailers have provided little incentive to come back. Instead of understanding how consumer needs were shifting, many retailers responded by optimizing costs: cutting store associates, reducing inventory and closing stores. Put another way, their response to customers not coming to their stores has been to reduce service and make check-out lines longer, limit the selection of product, and not be conveniently located.
Traditional consumer goods manufacturers have had missteps too. Still seeing the vast majority of sales coming from physical retail channels, they have been slow to evolve to digitally centric capabilities and direct consumer relationships. Digital has accelerated the destruction of the mass market and without granular connection points, many consumer goods companies lacked headlights into shifts in consumer taste profiles and demand drivers and have suffered as a result.
In both cases, start-ups have exacerbated this situation and given consumers new options and provided new types of value. Often emerging from a solution to an unsolved consumer need, this digitally native class of new entrants are unencumbered by dated infrastructure and perspectives, helping them outmaneuver large legacy entities. Bonobos provided better fit, and broader, fresher product variety because its supply chain was built to do so. They now generate more than $150 million in revenue. Early ecommerce pure play CSN Stores solved consumers challenge around finding products online by opening more than 200 online shops dedicated to niche products matching their URL such as cookware.com. They grew to generate more than $100 million in global revenue before consolidating as Wayfair, which now has net revenue of $2.25 billion.
It’s not that legacy players are standing idle. Over the past few years, Nordstrom has acquired Trunk Club and Hautelook, and made investments in Bonobos and Sole/Society. Unilever acquired Dollar Shave Club in mid-2016 for a $1 billion, and the Wall Street Journal recently reported, “large consumer-goods companies lost $18 billion in market share to smaller competitors between 2011 and 2015.” Now, many have created internal venture funds which did 70 deals in 2016 for food and beverage companies alone. Still, many continue to report flat or falling revenue.
DIAGNOSING THE CORE ISSUES
At the core, there is a gap for many companies between its operating model (what it’s built to do) and its business model (what it wants to do). To function effectively and efficiently, a company’s operating model should align with its business model. Put another way, how a company organizes its assets, capabilities, and infrastructure should support who its customers are, what products or services it provides and the manner in which they are provided. Yet even strong performers are largely built for a time gone by.
Based on recent Publicis.Sapient research, only 36% of companies report prioritizing commerce activities within their digital transformation agenda. Even more surprising is both Retail and Consumer Goods companies under-index on this question, 30% and 33% respectively. Other objectives, including cost savings and the pursuit of operational efficiencies have been top priorities for both.
What’s in fact happening now is digital leaders are evolving from the cost optimization goals of Digital Transformation 1.0, to a more progressive, growth oriented focus in Digital Transformation 2.0. Cautious experimentation and fragmented efforts with no effort to consolidate learning for broader, commercial application will no longer be sufficient. Neither is the current trend in making investments or acquisitions in startups with the hope that the digital magic and operational agility will automatically transfer into the core organization. What’s required is strategic commitment, and a systematic approach to transforming human behaviors and business processes, as well as technologies.
It used to be said the three most important factors in retailing were: location, location, location. Specifically, geographic location of stores in close vicinity to customers. For consumer goods companies, who sold through retail, it was location within the stores. Specifically, vicinity to eye level, a major aisle-way or the cash register. Location has been a core tenet of success in both industries. As the Internet has largely rendered this physicality of location obsolete, and location, location, location should be replaced with new attributes, such as data, agility, and flexibility, which are more aligned with requirements of progressive commerce business models.
To size the gap between legacy and progressive operating model capabilities, companies must start exploring questions around four areas:
· Clarity of Need: Does the executive team have alignment around a clear commerce vision? Is the vision supported by a strong economic rational?
· Customer-Centricity: Do your most important customers significantly benefit from your commerce improvements? Will the change process create new friction points that encourage shopping elsewhere or damage the brand relationship?
· Internal Competency: Do we have the right cross-functional skill alignment in place today to execute against this evolved mandate? And, if not, do we have the cultural competency for process change and skill upgrades?
· Organizational Commitment: Does the initiative have a visible and vocal executive sponsor who will keep organizational focus when the effort is challenged? Is there sufficient budget allocated and governance transparency to maintain momentum?
The answers to these questions will create a foundation from which a transformational program can be scoped and designed. This is where the real work really starts.
Reorienting internal perspectives and replacing hard-coded heuristics with fresh approaches and new opportunity will be daunting for many. As with any transformation initiative, people-focused side — belief and behavior change management — is at least as important as all others. New technologies and an advanced aptitude for data is central to a progressive commerce operation. However, the strongest link between what a company wants to do (the business model) and what it can do (the operating model) is still enthusiastic, aligned people.
 US Census Bureau, December 2016
 The New Digital Divide: The Future Of Digital Influence in Retail, Deloitte University Press
 Source: 2016 Publicis.Sapient/Fortune Knowledge Group Global Digital Transformation Imperative Survey