Digitalization and the Codes of Customer-Centric Retail
While the term digital transformation can be interpreted in many ways by different organizations, at Korn Ferry we view digital transformation as the transformation of all elements of companies, from their business model to their leadership requirements and talent needs.
Since the mid-20th century, with changing consumer needs, increasing competition, and technological progress, the retail sector has been in constant development and transformation. Over the decades, this transformation has taken place around the supply chain, store, and product. In contrast, when we examine recent practices and developments, we are faced with a much more radical and rapid transformation than its past examples. Together with globalization and the wave of entrepreneurship, this wind of transformation has come to influence nearly every country's market and has become the new norm of the markets.
Digitalization Paves the Way for Fast Fish in Retail
Due to the effectiveness of digitalization, while large players try to take steps toward digitalization under their hierarchical structures, agile startups are emerging in every link of the sector's value chain.
In this uneven competition, retail companies that are already under pressure to protect their earnings before interest, taxes, depreciation, and amortization (EBITDA) and improve their cash conversion cycles must transform their capabilities and digitalize in order to become tomorrow's retailer and offer their customers the right product at the time and place the customers want, at the ideal price. While entrusting the ownership of this transformation directly to CEOs seems most ideal under current conditions, we can foresee an increase in the number of CXO roles responsible for digital transformation in the coming years. Nonetheless, in every case, in terms of the applicability and sustainability of the transformation, the role of senior management and the ability of all stakeholders (from suppliers to all support functions) to support this transformation is critically important.
When we assess the present with the vision of becoming tomorrow's retailer, the situation in Turkey and specifically in the retail sector does not look very encouraging. According to the digital sustainability index that emerged from research conducted by Korn Ferry together with Oxford Analytica on 362 firms in 14 countries, including Turkey, the consumer industry group, which includes the retail sector, ranks last among 5 sectors.
In the world, nearly one out of every two digital transformation initiatives ends in failure, and this annually results in a total of $1 trillion in cost to companies (IDC, PulsePoint, Everest Group), making a methodological approach to change vitally important. So how will we obtain successful results from this digital transformation, which directly affects our business outcomes and the way we do business?
Digitalization Also Brings Differences to Talent Management
As business models evolve with digitalization, the talent requirements needed to bring these business models to life are also changing. In the digital world, where business models shift from hierarchical structures to matrix and network structures, and where demanding, fast-learning, and results-oriented talent flourishes within these structures, digital leaders managing these structures also play a critical role. It is vitally important to think about transformation through these three critical complementary variables. Drawing on MITSloan's approach, we will examine what this transformation, which places the customer at its center, means for the retail world from the perspective of business model transformation.
Customer Experience and Digitalization
In the retail sector, which can analyze consumers better with increasing data depth and evolving technologies, transformation must begin with customer experience in order to differentiate in competition. Easy-shopping and product/service personalization practices are coming to the fore in the sector with the aim of providing consumers with a better shopping experience, increasing basket size, and turning them into loyal customers who shop repeatedly. In this direction, retail companies are rapidly digitalizing their stores (for example, Amazon, Alibaba-Hema), while making moves to win consumers with innovative approaches such as service-intensive sales channels, pickup points (for example, Walmart, Instacart) alongside online and mobile channels, or trial stores (for example, H&M). Undoubtedly, turning every piece of consumer information into data and processing it is highly effective in this transformation. The most important factor behind why companies like Zara, Walmart, and Amazon dominate the market so heavily today is undoubtedly that they offer the right product and service to the right consumer audience at the right time. In this context, beyond the unignorable importance of consumer analytics, agile organizations with mechanisms that can implement decisions at the most accurate time and manner based on analytical work will differentiate in competition.
The Added Value Created by Digitalization in the Operational Process
The most suitable product or service for today's consumers, who demand every type of product at any time and place, can undoubtedly only be provided by transforming the entire company value chain, and even the business model, around the consumer. In this context, one of the most critical and well-known elements in sustaining this transformation is undoubtedly the digitalization of operations. When we define the digitalization of operations as transferring/improving processes to the system and monitoring them with advanced performance metrics, we actually see that it is an approach that has continuously occupied the agenda of all sectors for the past 30 years and whose roots go back to Ford's lean production. Although these and similar process improvement approaches were initially used for production processes, with the wave of enterprise software solutions (such as SAP) in the last 20 years, they have also spread to head offices. Today, when we talk about the digitalization of operations, technological developments such as artificial intelligence, the Internet of Things (IoT), or Blockchain come to mind, requiring us to redefine everything we know. We know that many global retail companies have started using Blockchain and IoT technology, especially in supply chain and warehousing systems.
When we evaluate developments specifically for the retail sector, the limited use of systems in operational processes, from store management to logistics, warehousing to procurement, and finance, offers significant development opportunities to sector players. When we examine the practices of Walmart, the world's largest company and retailer as a trendsetter; while the company only transitioned to self-service retail in 1965 (the first self-service market was Piggly Wiggly in 1916), just 10 years later it became one of the first retail chains to establish a 100% in-house distribution network. By the 1990s, it had launched one of the first analytical studies in the sector to personalize its product portfolio and conduct local pricing. It also achieved the first major supplier-retailer integration with P&G in the 1990s, and stood out with its payment systems and sustainability investments in the 2000s. Today, while expanding its portfolio with acquisitions like Jet.com, with its main focus, the omni-channel strategy, it aims to provide consumers with the best price through a fast and easy shopping experience from every channel it can reach (Walmart to go, the Walmart-Uber agreement, etc.). As we can see from Walmart's roadmap, the retail sector is in the midst of a transformation that defies definition. With mobile and online commerce, distribution and logistics models, payment systems, in-store technologies, digital warehousing methods, simulations on the procurement side, and next-generation decision support systems, business models and the ways of doing business in the sector are differentiating. Different retailers in different countries are signing off on various technological developments and innovations to provide their consumers with the most suitable experience and to differentiate in competition.
Will Digitalization Cause Job Losses in the Retail Sector?
The culture clash that flared on the Whole Foods side after Amazon's acquisition of Whole Foods, and discussions about technology replacing labor, reveal that such concerns are at least felt in physical stores. In this context, Korn Ferry's research (Future of Work - Korn Ferry) shows us that as technology develops, the role of skilled labor increases; while the number of operational personnel needed in digitalized payment systems and warehouses tends to decrease, more skilled people are now needed. In head offices, we are moving toward a world where employees are equipped with decision support systems and have a more flexible way of working and career path.
The Business Model in the New Era
We see that leading retail companies developing their technology capabilities aim to invest in renewing their business models and create new initiatives in the coming period. Undoubtedly, the biggest reason for this is that company life cycles have shortened considerably in the new economic system. Even if you are successful under current market conditions, it will not be easy to maintain this due to the dynamism and uncertainty inherent in the retail sector. Moreover, considering that theoretically you do not own the entire market share, while competing with big players on one hand, startups starting to take from your market share on the other may be hindering your growth. Against this situation, the ways of making money must be continuously questioned and adapted to market conditions before market volumes are hit by another company. You may still be making money with the retail approach of 20-30 years ago, but it would not be unexpected for your company to be irreversibly dragged into disappointment in three to five years.
Within the framework of digital transformation, we can approach reviewing your business model in the retail sector from two angles: the first is the group of transformative business models that are self-transforming dynamically from a static state to one that can adapt to changing market conditions; the other is the disruptive business models that act contrary to the traditional retail approach. We can also view this approach as living by transforming in the existing red ocean or creating new blue oceans.
When we examine disruptive & innovative business models in the retail sector, we see that initiatives focused on product innovation and easy shopping (convenience) come to the fore, aligned with consumer trends (especially healthy product, sport, personalization, transparency). In the US market, examples like Instacart and Shipt (see Google Express, even Google, despite being ineffective, has entered this market) provide transportation services as intermediary platforms; while initiatives like Peapod, Freshdirect, and Amazonfresh provide both easy shopping services and quality fresh products. In addition, examples like Brandless are causing us to completely question our perspective on the product in the retail sector. In our country, apart from examples like Getir, KapGel, and similar ones, there is no retail company that tries to push consumers toward innovation. As a good example on the physical retail side, while Migros aims to maintain its advantage as the first online food retailer (Sanalmarket.com) by growing, with the Tazedirekt acquisition, it has chosen to grow in a way that defends against disruptive-innovative business models while also being contrary to its own business model.
Specifically for the retail sector that touches the end consumer, the fundamental basis of self-transforming business models is consumer trends/behaviors. Returning to the beginning, today every change in your business model, organization, or ways of doing business in stores (including online and mobile) must address consumer movements. The basis of every strategic move of ours, in the short and long term, must be this. In this direction, agile organizations that can quickly make decisions and turn their analyses, customer feedback, and seen development opportunities into actions that advance their products/services will have the opportunity to transform themselves. For this, culture, organization, and talent/leadership are vitally important. Abroad, both large physical retailers like Tesco and Walmart and online retail companies like Alibaba and Amazon are transforming themselves. Transformation is fundamentally carried out with a focus on differentiating/customizing the paths to the consumer by producing alternative channels and easing the shopping task that takes a significant amount of consumer time. In this context, online retailers' transition to physical stores, which has clearly emerged with Amazon's Whole Foods acquisition, the transition of nearly all physical retailers to the online channel, that is, online-offline integration, and the entry of technology companies into the competition, will make transformation faster and more obligatory.
To summarize, with the development of technology and the homogeneous spread of information, we are entering a different consumption world. By its nature, the retail sector is among those most affected by this change. Looking at global examples and the trends of the sector and consumer, we foresee that tomorrow's retailers will have much more service-oriented and customer-centric digital business models. Companies can only succeed in this digitalization-driven transformation adventure with the right talent, within agile organizations, and under the management of digital leaders.
On this journey of retail companies, as Korn Ferry, we support our local customers with our global experience across a wide spectrum, from implementing your digital strategy to designing agile organization models, from designing your performance system and corporate culture in line with the new digital world to talent and leadership transformation, and we take great pleasure in doing so.
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