What is the best strategy for retailers?

There just doesn't seem to be a retail strategy that works these days.  If you've been watching the news lately, you've probably come to the conclusion that brick-and-mortar retailing is sick, if not dying.  Just check out this article:  "Everything must go".  But is this the end for retailers?  Is there any way forward?

Let's examine what looks like the biggest issue:  online sales are still growing, at the expense of traditional retail.  You don't have to be an expert in consumer behavior to understand why.  There are compelling reasons for consumers to prefer making their purchases online.  I call these the Four C's of Online Advantage:

1.  Cost - Online stores tend to be cheaper.  Without the expenses (labor and real estate) associated with brick-and-mortar, online stores can profitably offer products at lower prices.

2.  Choice - Online stores can offer a broader inventory.  Low turnover products are more practical when your traffic is virtual and you may not even have to own or store your inventory.

3.  Convenience - Bad snowstorm?  Don't feel like fighting traffic?  You can shop online without leaving your bed.

4.  Customization - Online stores get more data about shoppers more quickly and cheaply than brick-and-mortar stores.  This one is a hidden weapon, and a powerful one.  Even the smallest online retailer has better data about why traffic comes to their store and much easier means of reaching out to past customers.

With just these four advantages, brick-an-mortar retail looks like a bad bet.  Is there any way to beat these odds?  First, you have to accept a basic idea in strategy for consumer markets:  you cannot win fighting against what the customer wants.  If customers prefer the cost, choice, convenience and customization, they will prefer online.  Strategically, you can attempt to match these advantages, but you will be matching your weakness to the strength of online shopping.  This is not to say that you shouldn't try to be competitive in these areas, but rather that attempting to be equal will cost you more than it is worth.

So what are the advantages brick-and-mortar can bring to the battle?  There are several tremendous advantages you should be using in your retail business.

1.  Experience - No matter how great a website or shopping app is, it is simple not physical presence.  Customers can only see and perhaps hear a website.  In brick-and-mortar, customers can also feel, touch, smell, taste and physically interact with your store, products and people.

2.  Immediacy - Customers can walk into a brick-and-mortar store and walk out with a product in a matter of minutes.  Even the best online distribution systems can't perform that well for physical products. 

3.  Social contact - brick-and-mortar stores enable customers to interact with staff and each other.  In some cases, there is a social life centered around traditional retail that is hard to replicate online.  In all cases, customers get to conduct transactions with human beings, which is a preferred mode for some purchases.

4.  Distribution - in some markets, such as fresh produce, delivering the right product to the customer at the right time is a very difficult challenge.  Online distribution systems, especially the last leg from the retailer to the customer, face great difficulty delivering such products efficiently.

These four areas make up the basic reasons why some customers will always prefer brick-and-mortar for certain transactions.  By implication, there are some retail experiences that may always be local rather than online - farmers markets, bars and fitness centers, to name a few.

But what if you are in one of the retail markets that is more prone to online shopping?  The strategic options for those retailers become much more difficult.  Basically, to compete effectively with online retail, a brick-and-mortar store must deliver greater value from its advantages than it loses to disadvantages for each customer it seeks to win.  Mathematically, traditional retailers cannot win every contested customer, but they must win enough of those customers to create sustainable turnover.  Here are a few options that make sense:

1.  Give up the commodity customer - some customers will always seek the cheapest source, no matter what.  In many markets, these are simply not the right customer for brick-and-mortar.  The cost of getting these customers in the door far exceeds the margin you can make from them long term. 

2.  Make the store an experience - if the store is enjoyable, some customers may prefer the sensory stimulation and social experience.

3.  Put more social in the store - I am not referring to social networking, which may help, but rather making the store a focal point for the community it serves.  A store that facilitates community will be preferred by some customers.

4.  Emphasize the immediate interaction - a store that delivers value because the last leg of the transaction is nearly instantaneous gains a big advantage over online competition.

Examining these four ideas suggests that certain models of brick-and-mortar retail are going to be more successful than others.  Commodity strategies, such as those commonly seen in big box retail, will be more challenged than the strategies of niche stores.  Customers will not look favorably upon a bland, impersonal warehouse filled with products if they can get a better deal with wider selection online.  They will also not abide ill-trained and uncaring retail staff, since an impersonal transaction can be done much more efficiently online.

The road ahead for brick-and-mortar retail is not easy.  Some costs may go up, while many will feel tremendous pricing pressure from online competitors.  A clear strategy that targets and caters to a specific group of customers is required to succeed in the changing retail world.  Any retailer who fails at this is doomed - but those who succeed will find a strong long-term position in their markets.  Strategic planning is the key to finding this success.

Would you prefer sales growth or profit growth?

Often, before I work with a company on strategic planning, I ask the owner or CEO what success would look like for him or her.  This simple question has been the source of some great soul-searching over the years.  One of my earliest clients answered – very quickly – that he wanted sales growth.  We created a plan that delivered that, and then some.  The company nearly doubled in size in a short period of time, but the next time we did strategic planning, the owner told me he wanted more profit – even if it meant slowing down growth.  This is not unusual – and many people try to pretend that there isn’t a trade-off.  While it is true that both profit AND sales growth are possible simultaneously, it is much, much more likely that you will experience one or the other.

Here is why most companies experience either sales growth or profit growth:  customers aren’t particularly interested in either of these things for you.  Customers want the best deal on the best products and the best services with the most features and the most convenience.  Try to do all those things at once, and you are going to lose money – unless you have a magic recipe somewhere (and granted, it’s possible, but much more rare than most gurus would have you think).  So…we can sell MORE to customers if we give up a little – or we can sell LESS and make more money.  Your competitors have the same deal going on – some may have special know-how that enables them to wiggle about a bit in this equation, but every company runs into this wall, sooner or later. 

A few years back, I analyzed the results of dozens of companies that I’ve worked with, and this tendency became very clear:  the top performers in sales volume growth were in the bottom quartile in profit growth, and vice-versa.  I find this result a little surprising:  most of us assume that overhead absorbtion creates an economy of scale as you get larger.  The problem with this assumption is that size attracts – you guessed it – competition, and so there is a higher need for investment and the overhead that comes along with it as you get bigger.  In other words, for most companies, there is no magic size you can reach where you are not going to be beset by competition.  If you don’t believe me, take a look at companies like Apple and Exxon-Mobil.  They make great money, and they are huge, but they have to invest heavily to maintain their position because a big company is essentially a HUGE target for competition.

So here is a question for you – would you like to see super high growth in sales or profits – or would you be happy with mid-range numbers in both?  If you can make a clear, focused choice, you will be far ahead of your competitors.

When Should You Get on the Bandwagon?

You have no doubt seen many of the indicators that the recession may soon be over (if it isn't already, a view held by some very smart economists). This doesn't mean everything will return to the rosy days of, say, 2006, but it does mean the economy will begin growing again. With this knowledge, you are probably thinking about when you should consider revving up the profit engine in your company. The timing of this can be a critical question in many industries.

As a general rule, you don't want to rev up too early, because you will increase your expenses to do so, and profitability will suffer as you spend on capacity that you do not need. On the other hand, you also don't want to rev up too late, because this could easily lead to a loss of market share as your inability to fill orders in the short term pulls you up short. A more difficult and probable effect of undercapacity is that parts of your distribution channel - and even individual customers - are likely to switch to competitors when you cannot meet their needs.

These two factors push against each other - the risk of increasing expenses too early tempers your desire to reduce the risk of losing market share in a recovery. Obviously, excellent forecasting - or at least close attention to real economic data - can be very valuable to you here. Beyond timing your return to expansion precisely, you should also assess the real risks of both scenarios. If you are pursuing commodity strategies, the cost of increasing costs too soon may be unbearable with your super-lean cost structure. On the other hand, a specialty strategy may lead you to see the cost issue as small compared to the risk of losing market share, especially when some market share loss may be permanent.

How should you handle this in your strategic planning? An objective look at your current financial model and market position should be a part of at least some of your monthly strategy implementation review meetings. Until we have passed the current economic inflection point, you will be well-served to look at the upside AND downside of both increasing costs and losing market share.

Keeping the Excitement in Strategic Planning

The other day I was watching my son play a game on the internet. It's a tedious game, with lots of repetitive action, and I was puzzled by how much he likes this game. You see, my son gets bored pretty easily. Getting him to do his homework can be a real challenge. But there he was, clearly enjoying spending an hour on a task that looked suspiciously like work to me. Why?

People who have researched this kind of behavior point out that the key to my son's enjoyment of the game were the "levels" he was achieving. You see, playing the game properly (which isn't that hard) leads to gaining a "level". This game started out as a pretty easy one - my ten-year-old was able to gain ten levels in his first hour of play. After a while, though, it got harder...and he still kept going. He's proud of his levels. He talks about them with his friends. And it turns out they all play this game - a lot.

What can we learn from this behavior? I see three key points for keeping excitement going for anything in your business:

1. Measure, measure, measure. Everyone wants to keep score, and the things we measure help create a sense of accomplishment.

2. Give feedback. While some people are motivated by team scores, most individual effort seeks a personal score. The more immediate the feedback, the stronger the motivation. If it takes a quarter to get feedback, you won't get as much bang for your buck.

3. Allow comparison. People love to measure themselves against each other. It's the equivalent of little boys talking about what level they are in a game. Think about how to give your people useful feedback about their contributions to your efforts that make sense when compared with others.

Are there pitfalls in this approach? Absolutely. You can measure the wrong thing. Sometimes feelings will get hurt. And some measurements will make key people think they aren't contributing much - when, in fact, they are critical to your success. But a little thought can lead to great excitement about the things that really matter to you and your company.

If progress on your strategic planning seems to be slowing down, you may want to consider how to get your team to treat the process as more of a game. While some teams just don't have the spirit, a good team will always seek to win when they know there is a score.

Strategic Planning Fix #3 - How Do You Track Your Implementation?

Most people who claim to do strategic planning really fall down on this one. If you are ever in a position to interview someone who claims to be a strategist, make sure you ask them what percent of strategic objectives are met by their average client. Half will choke on this question, because they don't track it (and how can you optimize something you don't track?).

The cold, hard fact about strategic planning is that it isn't over when the strategic planning meeting is over (and the consultant goes home). Strategic planning is NEVER done - it is part of a cycle of activity that should be changing your company in significant, noticeable ways over time. If you are doing strategic planning and you are not seeing noticeable change, it's probably because you have no mechanism for tracking.

In Simplified Strategic Planning, we tell people to review progress on strategic objectives by writing action plans for them with monthly milestones - and then track progress on those milestones with a mandatory monthly review meeting. This meeting takes a couple of hours most months, and is well worth the time. There are two key benefits you get from this: (1) It puts accountability into the implementation plan and (2) It gives you the ability to correct your course in mid-year when reality doesn't match your plans.

In my experience, of the hundreds of companies I've done strategic planning with over the years, the top 10% ALL do a monthly monitoring meeting and the NONE of the bottom 10% do a monthly monitoring meeting. When you consider that the top 10% in my database averaged 40% per year profit improvements over 5 years, you can see why I strongly recommend this approach!

Strategic Planning - Should you go for the home run?

Every once in a while, when I'm doing strategic planning with a client, we hit a home run. It doesn't happen with every client, and it doesn't happen every year, but it does happen. A frequently asked question is "Should we try to get a home run?"

I have two very opposing views on this. The first is that swinging at home runs can be very distracting and, when you actually get a hit - it can be downright disastrous. One of my earliest home run stories tripled the size of the company in less than a year and brought their strategic planning to a halt. Within three years, the company - partly because they had stopped planning - had serious growing pains, including cash flow issues. The great "opportunity" they had found nearly killed the company! This is not as uncommon as you would think - there is a very real danger of growing your company to death. Also, let's not ignore the fact that, as in baseball, you are likely to have a lower batting average if you are always hitting for the fences.

On the other hand, while most of my success stories are about dependable, steady growth, there are quite a few that were explosive...and that can be the just thing to get a company out of a rut. Certainly, I'm proud of the home runs that worked out well, because they were built on sound strategic thinking and created sustainable competitive advantages.

So my basic answer is this: put most of your effort into your strategic competency, and the strong, steady growth that comes from that. Consider having a project with home run potential on a side burner, especially if it relates to your competency, but don't bet the farm on it. And...if it starts to take off, be very careful of how it will affect the viability of your company in the long term. Strategic planning is an excellent tool for assessing these kinds of situations, and if you are looking for explosive growth - or in the middle of it - you will be well rewarded if you take the time to do a good job of strategic planning.

Cash Flow - Is it Strategic?

Cash flow is both very strategic and very un-strategic. What I mean by this is, cash flow is the thing that kills most companies that go out of business. I've seen otherwise profitable companies driven to insolvency by poor cash flow management. So staying on top of your cash flow is definitely a strategic priority. But cash flow is also very, very tactical. It has very little to do with the reasons why most companies succeed, and often, cash flow goes down when a company makes good strategic moves. Watching cash flow has rarely led to good strategy - and in fact, companies that are too obsessed with cash flow may be driving away otherwise very profitable customers. So, watch your cash flow, yes - because it affects your survivability. But if the ship isn't sinking, remember to stay focused on moving forward.

Strategic Planning - avoid the wannabe strategic plan

One of the fascinating things I think about these days is all the nonsense that passes for "strategic planning". Strategic planning is a VERY specific process, which involves setting the course of an organization. A good strategic plan always answers the following 3 questions:

1. What do we do?
2. For whom do we do it?
3. How do we beat the competition (or absent competition, how do we excel)?

A good strategic plan also incorporates a systematic analysis of the environment, current situation, organizational capabilities, and assumptions about the future as a foundation upon which to build the answers to those questions. Finally, a good strategic plan, being a tool for creating better results, is simple and includes short-term implementation activities that make a critical difference in pursuing your organization's long-term vision.

Anything less than this is just a piece of a strategic plan that someone is calling a strategic plan so they can charge you more money for it. At best, these planning fragments will be useful but leave you exposed to many of the common pitfalls of poor strategic planning. At worst, they will waste your organization's time and money and leave people disillusioned about the entire strategic planning process.

Fortunately, the Simplified Strategic Planning process will help you avoid these pitfalls. Unlike ANY other model, it has been fine tuned through application over 25 years in hundreds of companies of all sizes.

Strategic Planning - Reinvigorating your strategic planning process

After a few years, clients almost always ask, "How can we put life back into our strategic planning? We've achieved great success, but we'd like to have the same level of excitement we had in the first few years."

This question often comes up for reasons that are inherent in the process itself. First, strategic planning - as an ongoing process - tends to yield easy benefits in the first couple of years, as your team focuses attention on the low-hanging fruit. After a couple of cycles of this, the fruit that is left may seem to be a little harder to reach...and often, it is. Secondly, if your process is well-run, each cycle of planning will seem more like a part of your management routine and less like a special event. This is true of any process that you repeat routinely, but with strategic planning, the first couple of years seem strange and wonderful because good strategic planning is so far outside the norm for most managers. Finally, as your team gains experience with the process of identifying strategic objectives and effectively implementing them, they also learn how much work is involved...and there may be a natural reluctance to commit to the big, exciting projects that bring so much energy to the first few years of strategic planning.

In the next few posts, I'm going to take a look at some exercises I have used to give the ongoing planning process a little more "zing". In general, these exercises fall into 3 categories:

1. Making the strategic plan more personal - many plans lose their "zing" because they seem to be about someone else...so identifying how individuals affect - and are affected by - the strategy can help reverse this.

2. Giving the vision more substance - sometimes, the vision encompassed in your strategy is too abstract for the team to "get into it". In these cases, some work on what the reality of that vision will look like can be just the thing.

3. Drilling deeper into specific parts of the strategy - in many cases, there are things just below the surface that can dramatically transform your company. A little digging in some specific areas can turn up gold!