12 minute read 30 Mar 2018
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How retailers can gain the ultimate competitive advantage

By

Marcie Merriman

EY Americas Cultural Insights & Customer Strategy Leader

Student of human behavior, lover of transformative design. Living at the intersection of culture, commerce and technology to build human-centered experiences. Catalyst. Entrepreneur. Mom.

12 minute read 30 Mar 2018

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Building a customer-centric organizational culture is even more important than technology.

The winners in today’s tumultuous retail industry range from mammoth platforms offering everything under the sun to quirky specialty emporiums with tightly focused selections. But they have one thing in common: they understand that their business begins and ends with the customer.

And today’s customers have high expectations. They expect to have instant access to whatever they desire — they can dial up a movie with a touch of their screen; spend a week at a theme park without once reaching for their wallet, thanks to the “magic band” on their wrist; or receive automatic software updates to extend their car’s battery life in the midst of a hurricane. Instant access and gratification are the new norm.

With this comes elevated expectations of ease, seamlessness and the feeling of being “known” by the merchants with whom they interact. Organizations that fail to clear this bar are quickly bypassed for others ready to fulfill their needs. The days of loyalty and limited options are dead.

Culture transformation: a fundamental shift

Large, established retailers often struggle to deliver in the face of customers’ changing expectations, because they cling to the organizational cultures that served them so well through most of the 20th century. What characterizes these cultures is the belief that the merchandisers — historically at the top rungs of the retail hierarchy — know through experience and intuition what customers really want.

These organizations focus obsessively on the next quarter’s results — if not next week’s — and rely on hefty bonuses to keep a lid on employee churn. They use outmoded metrics of success such as store profitability and sales per square foot, and the bulk of capital spending is allocated to gradual store expansion and refurbishment.

Their call centers operate on a 9-to-5 schedule unsuited for a world where work, life and play occur around the clock. Their e-commerce divisions are usually removed from the rest of the business, and their brick-and-mortar stores, potentially a source of competitive advantage, are often starved of funding as retailers build up their digital capabilities. And, preoccupied as they are with fending off challenges from both incumbent rivals and new entrants (not to mention internal turf wars), they fall into the trap of matching the competition’s moves rather than creating customer desire, the life force of retail.

If incumbent retailers are going to do better than simply hold their own against the tide of new, digital-native entrants, they need to reorient their businesses to put the customer at the center of their activities. Succeeding in the retail business of today and tomorrow, in other words, depends on culture as the ultimate competitive weapon.

The key task for incumbent retailers, then, is to build a customer-centric organizational culture, starting with clear top-down guidance that this culture change is the only path to long-term survival. It’s not just a matter of integrating new technologies. Certainly, retailers that don’t adapt to new technologies, including artificial intelligence, will be doomed. But cultural transformation entails much more than implementing new technologies and is essential to long-term relevance.

Cultural transformation demands a fundamental shift in focus. Rather than devote the bulk of their energy to managing and integrating disparate sales channels, retailers need to design organizations that can work across functions to deliver seamless, end-to-end experiences that put the customer first.

They need to reorganize themselves to operate holistically, with their front, middle and back offices working in concert and taking an outside-in approach to the customer experience. And none of this can happen without a radical change in culture.

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Chapter 1

New culture, new capabilities

New entrants have raised the customer experience bar and incumbents can learn from the new ways of working.

Transforming the culture to promote a customer-first focus and cross-functional collaboration opens the door to numerous new capabilities — in particular, the design of customer experiences that encompass and integrate every step of the shopping journey, whether it’s physical or virtual. The experience may be entertaining or aesthetically pleasing, but most of all, it must be functional, guiding the customer along every step of the journey, seamlessly and intuitively.

That undertaking requires retailers to build key digital capabilities, including analytics, agile development processes, and machine learning — among many others — all while maintaining an unwavering focus on the customer. And in a world where new entrants are changing the rules of the game, many incumbents will need to reassess their metrics for success.

By taking concerted action across the enterprise, retailers can match or better the experiences offered by digital-native rivals without breaking the bank or throwing day-to-day operations into chaos. If they act now, and follow through rigorously, they can keep pace with ever-rising customer expectations and survive in markets growing ever more crowded with new competitors. It’s those new entrants that have raised the customer experience bar, and incumbents can learn from their new ways of working.

The new entrants and innovative approaches don’t even have to be in the same industry or geographical area to offer lessons to incumbents. By studying how shoppers in China, Japan and Singapore, for example, are rapidly assimilating new technologies into their shopping behavior, retailers can get a preview of what to expect in their regions. In other words, the best view of the future may be from outside the retailer’s own four walls.

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Chapter 2

Breaking down walls, building bridges

Retailers must learn to work within ecosystems and across organization and industry boundaries.

That’s counter to the practice of most established retailers. But to thrive in today’s environment, retailers must learn to work within ecosystems and across organization and industry boundaries if they want to keep up with the customer.

Retailers must reorganize functions, processes and roles and responsibilities to deliver consistent, integrated experiences, no matter how and where the customer engages the retailer. These changes are especially important to the design of the hybrid experiences — such as shopping journeys that begin with an online order and end when the customer picks up the order at a bricks-and-mortar store — that are an increasingly popular shopping mode.

By adopting a culture of internal and external collaboration, retailers create enormous opportunities to develop experiences that disrupt their industry. Not even the most adept digital-native retailers have fully mastered the new art of selling, and that gives established retailers a chance to regain the upper hand in contested markets. By creating agile, flexible organizations that can anticipate where customers are going and engage them when and where they want to shop, established retailers give them a chance to reverse the erosion of their competitive position and leverage the power of their brands, scale and talent to win the future.

  • Culture changes are already bearing fruit at a handful of leading traditional retailers. Examples include the leveraging of digital-native talent, brought on board by acquiring successful dot-com disruptors, to rapidly institute and scale “click and collect” in their stores. Customers can shop online with an app and collect their purchases at a physical store location, where the app enhances the shopping experience and delivers offers and incentives for additional in-store purchases.

    Many cosmetic companies, meanwhile, are moving past the traditional model of selling most of their goods at department-store counters staffed by makeup advisors toward an e-commerce model that relies on YouTube influencers to stoke demand. Others are combining apps and in-store digital tools to make the in-store experience more fun and immersive.

    These and similar approaches have had the curious effect of putting new entrants on the defensive by demonstrating that digital-only experiences can be enhanced through these higher-touch environments. As a result, many new entrants have opened physical stores and are experimenting with store formats and in-store experiences enhanced by digital tools.

    Their activity reinforces the view that brick-and-mortar is still an essential element of the retail equation — and that experience with physical store environments can be a source of competitive advantage. Incumbents can not only compete but actually lead the industry change if they pay attention to the way their culture and business models need to shift and act boldly in response.

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Chapter 3

Future-fitting the organization to put the customer first

Organizations that have made the most progress toward customer experience excellence tend to follow similar paths.

Most established retailers will need to reorganize and reorient themselves to operate holistically and work across functions and industry boundaries. It can be difficult to decide where to start, but those organizations that have made the most progress toward customer experience excellence tend to follow similar paths. Milestones along these paths include:

  • Conscious choices to make the customer the center of all activities. This requires clear communication from leadership about the customer priority and the actions required. The CEO, of course, must take the lead, but it’s also incumbent on the CEO’s direct reports to reinforce the message and model the new behaviors that culture change requires. And their direct reports must carry the message into the business’s operations, where culture change is integrated into day-to-day activities and turns from aspiration to reality.

  • Commitment from leadership to build crucial capabilities, especially those relating to agile innovation. 

  • Thorough strategic assessments of store layouts, merchandise mix and brand identity through the lens of the customer experience, with the aim of making each interaction frictionless and increasingly convenient, smoothly bridging the gap between physical and digital channels.

  • Rigorous evaluation of the supply chain to make certain the organization can engage with customers how, when and where they want to shop and deliver offers that suit their preferences.

  • Review and revision of the operating model to confirm that talent, organizational structure, processes, operations and technology are all fit for a new era in retailing. The role of store employees is changing, and as technology relieves workers of administrative burdens and repetitive tasks, retailers will need a plan for redeploying them to higher-value activities, such as offering authoritative, personalized fashion advice, or asking the right questions to make certain the customer finds the audiovisual system best-suited to their home and viewing habits.
  • It’s no exaggeration to say that agile processes are the key to creating winning customer experiences. Yet these processes are in many ways antithetical to established ways of working.

    Agile processes are characterized by close cross-functional collaboration (ideally in a shared location), rapid design and testing cycles and a focus on continuous improvement. Agile calls for new types of talent, such as ethnographers and anthropologists, webpage designers, copywriters and user experience specialists, to work alongside more familiar functions such as finance, merchandising and supply chain.

    Agile development teams work together to map every step of the customer journey, identify and relieve pain points, and design experiences that will not only be simple and convenient but also encourage the shopper to consider other purchases and repeat the experience early and often.

    For example, ethnographers work alongside marketers and analytics professionals to create shopper personas, while copywriters team with sales, finance and personalization specialists to craft offers relevant to those personas. They work in “sprints,” bursts of concentrated activity that usually last no more than a week, collaborating to design an end-to-end experience, with daily meetings to report on their work and agree on next steps, and rapidly testing the experience for effectiveness, correcting course as test results dictate.

    Agile processes produce improved experiences, and they help spread collaborative work methods across the entire organization. By modeling productive cross-functional teamwork, they help people in the organization learn to work across functions, conduct experiments, fail quickly and cheaply and learn from each failure. Perhaps most important, they establish and reinforce a mindset of continuous improvement, which is key to designing experiences that meet the evolving needs of the customer.

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Chapter 4

Creating customer-centric innovation

By applying the right technology at the right time, retailers can form a closer connection to the customer.

Today’s most successful and innovative retailers are cross-functional to the core. They are adept at bringing together the marketing, sales, finance and supply-chain functions to design and deliver — profitably — end-to-end experiences that customers want to repeat. They map the customer shopping journey in granular detail, learning all there is to know about what motivates customers to shop where they shop, what offers are relevant to them, and how they navigate across virtual and physical experiences when they shop.

Successful retailers identify their key customer segments through predictive analytics and enabling technologies. By applying the right technology at the right time, retailers can form a closer connection to the customer while providing the organization with the information it needs, when it needs it, to meet customer expectations.

Most important, a seamless and transparent organization will not only create experiences that build loyalty with employers and customers, it will enable customer-centric innovation. Conventionally, innovation comes from inside the organization. The process of customer-centric innovation changes that mindset to invite active participation from outside the organization. This broader way of thinking will enable retailers to innovate continuously and nimbly across the entire experience, even outside the four walls of the organization.

For decades, the cultures of the most successful retailers were the source of their strength. Whether high-end or mass-market, lavish or bare-bones, the avatar of urban sophistication or the epitome of country charm, yesterday’s retail champions had distinctive cultures that customers sought out and returned to.

Culture is just as crucial to today’s retail success stories. But today’s winning cultures, marked as they are by collaboration, data-driven decision-making, and rapid experimentation and learning, bear little resemblance to the cultures of the past. Established retailers can regain the high ground and compete with confidence against the new entrants swarming into the industry. It all starts with a customer-centered culture capable of adapting to rapidly changing conditions. And the time to start is now.

Summary

Established retailers can regain their dominance with a culture that revolves around the customer and the ability to make rapid adjustments.

About this article

By

Marcie Merriman

EY Americas Cultural Insights & Customer Strategy Leader

Student of human behavior, lover of transformative design. Living at the intersection of culture, commerce and technology to build human-centered experiences. Catalyst. Entrepreneur. Mom.