Notes- Retail Strategy

Retail Strategy

Strategy Perspectives

·         Strategy is that which top management does that is of great importance to the Organization.

·         Strategy refers to basic directional decisions, that is, to purposes and missions.

·         Strategy consists of the important actions necessary to realize these directions.

·         Strategy answers the question: what should the organization be doing?

·         Strategy answers the question: what are the ends we seek and how should we achieve them.

According to Henry Mint berg, people use "strategy" in several different ways, the most common being these four:

1. Strategy is a plan, a "how," a means of getting from here to there.

2. Strategy is a pattern in actions over time; for example, a company that regularly markets very expensive products is using a "high end" strategy.

3. Strategy is position; that is, it reflects decisions to offer particular products or services in particular markets.

4. Strategy is perspective, that is, vision and direction.

In Top Management Strategy, Benjamin and John Zimmerman defined strategy as "the framework which guides those choices that determine the nature and direction of an organization", This can be interpreted as selecting products (or services) to offer and the markets in which to alter them.

What Is A Retail Strategy?

The term strategy is frequently used in retailing. For example, retailers talk about their merchandise strategy, promotion strategy, location strategy, and private-brand strategy.

Retail strategy isn’t just another expression for retail management.

Definition of Retail Market Strategy

A retail strategy is a statement identifying-

1) The retailer's target market

2) The format the retailer plans to use to satisfy the target market's needs, and

3) The bases upon which the retailer plans to build a sustainable competitive advantage.

The target market is the market segments(s) toward which the retailer plans to focus its resources and retail mix.

A retail format is the retailer's type of retail mix (nature of merchandise and services offered, pricing policy, advertising and promotion programs, approach to store design and visual merchandising, and typical location and customer services).

A sustainable competitive advantage is an advantage over competition that is not easily copied and thus can be maintained over a long time.

Target Market and Retail Format

The retailing concept is a management orientation that focuses a retailer on determining the needs of its target market and satisfying those needs more effectively and efficiently than its competitors.

The selection of a target market focuses the retailer on a group of consumers whose needs it will attempt to satisfy.

The selection of a retail format outlines the retail mix to be used to satisfy needs of customers in the target market.

The retail strategy determines the markets in which a retailer will compete.

We define a retail market, not as a specific place where buyers and sellers meet, but as a group of consumers with similar needs (a market segment) and a group of retailers using a similar retail format to satisfy those consumer needs.

Building a Sustainable Competitive Advantage

The final element in a retail strategy is the retailer's approach to building sustainable competitive advantage.

Some advantages are sustainable over a long period of time while others can be duplicated by competitors almost immediately. Establishing a competitive advantage means that a retailer builds a wall around its position in the retail market.

Over time, all advantages will be eroded due to these competitive forces.

Seven important opportunities for retailers to develop sustainable competitive advantages are-

(1) Customer loyalty

(2) Location

(3) Human resource management

(4) Distribution and information systems

(5) Unique merchandise

(6) Vendor relations

(7) Customer service

A. Customer Loyalty

Customer Loyalty means that customers are committed to shopping at retailer's locations. Loyalty is more than simply liking one retailer over another. Loyalty means that customers will be reluctant to patronize competitive retailers.

Some ways that retailers build customer loyalty are by-

(1) Developing branding strategies along with clear and precise positioning strategies, and

(2) Creating an emotional attachment with customers through loyalty programs.

1. Retail Brands and Positioning- A retail brand, whether it is the name of the retailer or a private label, can create an emotional tie with customers that builds their trust and loyalty. Retail brands also facilitate store loyalty because they stand for a predictable level of quality that customers feel comfortable with and often seek.

2. Positioning- A retailer builds customer loyalty by developing a clear and distinctive image of its retail offering and consistently reinforcing that image through its merchandise and service. Positioning is the design and implementation of a retail mix to create an image of the retailer in the customer's mind relative to its competitors. A perceptual map is frequently used to represent the customer's image and preference for retailers.

3. Loyalty Programs- Loyalty programs are part of an overall customer relationship management program (CRM) program (detailed in Chapter 11). Members of loyalty programs use some type of loyalty card. Purchase information is stored in a huge database known as a data warehouse.

B. Location- Location is the critical factor in consumer selection of a store. It is also a competitive advantage that is not easily duplicated.

C. Human Resource Management- Retailing is a labor-intensive business. Knowledgeable and skilled employees committed to the retailer's objectives are critical assets that support the success of several companies.

D. Distribution and Information Systems- All retailers strive to reduce operating costs. They want to get their customers the merchandise they want, when they want it, in the quantities that are required, at a lower delivered cost than their competitors. Retailers can achieve these efficiencies by developing sophisticated distribution and information systems.

E. Unique Merchandise- While it is difficult for retailers to develop a competitive advantage through merchandise, many retailers realize a sustainable competitive advantage by developing private-label brands (also called store brands), which are products developed, marketed, and available only at that retailer.

F. Vendor Relations- By developing strong relations with vendors, retailers may gain exclusive rights-

(1) To sell merchandise in a specific region,

(2) To buy merchandise with better terms than competitors who lack such relations, or

(3) To receive merchandise in short supply.

Relationships with vendors, like relationships with customers, are developed over a long time and may not be easily offset by a competitor.

G. Customer Service- Retailers also build a sustainable competitive advantage by offering excellent customer service. Offering good service consistently is difficult. Customer service is provided by retail employees – and humans are less consistent than machines. It takes considerable time and effort to build a tradition and reputation for customer service, but good service is a valuable strategic asset.

Growth Strategies

Four types of growth opportunities that retailers may pursue are: market penetration, market expansion, retail format development, and diversification.

A. Market Penetration- A market penetration opportunity involves directing investments toward existing customers using the present retailing format. Approaches for increasing market penetration include attracting new customers by opening more stores in the target market or opening the stores for longer hours.

Cross-selling means that sales associates in one department attempt to sell complementary merchandise from other departments to their customers. More cross-selling increases sales from existing customers.

B. Market Expansion- A market expansion opportunity employs the existing retailing format in new market segments.

C. Retail Format Development- A retail format development opportunity involves offering customers a new retail format--a format involving a different retail mix--to the same target market.

Adjusting the type of merchandise or services offered typically involves a small investment, while providing an entirely different format, such as a store-based retailer going into electronic retailing, require a much larger and riskier investment.

D. Diversification- A diversification opportunity involves a new retail format directed toward a market segment that is not presently being served.

1. Related versus unrelated diversification- Diversification opportunities are either related or unrelated. In a related diversification opportunity, the present target market and/or retail format shares something in common with the new opportunity. This commonality might entail purchasing from the same vendors, using the same distribution and/or management information system, or advertising in the same newspapers to similar target markets. In contrast, an unrelated diversification lacks any commonalty between the present business and the new business.

2. Vertical integration- Vertical integration is diversification by retailers into wholesaling or manufacturing. When retailers integrate by manufacturing products, they are making risky investments because the skills required to make products are different from those associated with retailing them. Note that designing private label merchandise is a related diversification because it builds on the retailer’s knowledge of its customers, but actually making the merchandise is considered an unrelated diversification.

E. Strategic Opportunities and Competitive Advantage- Typically, retailers have the greatest competitive advantage in opportunities that are similar to their present retail strategy. Thus, retailers would be most successful engaging in market penetration opportunities that don't involve entering new, unfamiliar markets or operating new, unfamiliar retail formats. When retailers pursue market expansion opportunities, they build on their strengths in operating a retail format and apply this competitive advantage in a new market. Retailers have the least competitive advantage when they pursue diversification opportunities. These opportunities are generally risky and often don't work.

Global Growth Opportunities-

International expansion is one form of a market expansion strategy. The most commonly targeted regions are Mexico, Latin America, Europe, China, and Japan. International expansion is risky because retailers using this growth strategy must deal with differences in government regulations, cultural traditions, different supply chain considerations, and language.

A. Who is Successful and Who Isn’t?

·         Retailers with an offering that has universal appeal, such as distinctive merchandise or low cost, are the most successful at exploiting global markets. Some of the most successful global retailers are specialty store retailers with strong brand images and/or unique merchandise.

·         Category specialists and supercenter retailers may be particularly suited to succeed internationally because of their operating efficiencies.

·         These retailers are leaders in their use of technology to manage their inventory and distribution systems, and enjoy economies of scale that translate into good values for consumers around the globe.

B. Keys to Success- Four characteristics of retailers that have successfully exploited international growth opportunities are:

(1) Globally sustainable competitive advantage,

(2) Adaptability,

(3) Global culture, and

(4) Financial resources.

1. Globally sustainable competitive advantage- Entry into nondomestic markets is most successful when the expansion opportunity is consistent with the retailer's core bases of competitive advantage.

2. Adaptability- While successful global retailers build on their core competencies; they also recognize cultural differences and adapt their core strategy to the needs of local markets.

Store designs and layouts often need to be adjusted in different parts of the world. For instance, while discount stores in the U.S. are usually quite large and one level, stores in nations where space is at a premium must be designed to fit a smaller space and use multiple levels.

Government regulations and cultural values also affect store operations. Some differences, such as holidays, hours of operations, and regulations governing part-time employees and terminations are easy to identify. Other factors require a deeper understanding

3. Global Culture- To be global, one has to think global. It is not sufficient to transplant a home-country culture and infrastructure into another country.

4. Financial Resources- Expansion into international markets requires a long-term commitment and considerable up front planning.

C. Evaluating Global Growth Opportunities

From the retailer’s perspective, some countries represent better growth opportunities than others. Operational restrictions on retailers were lifted in China in 2004, leading to a number of retailers moving into the country. Doing business in China remains a challenge, though, due to increasing operating costs, challenges in finding and retaining talented management personnel, and inefficient supply chains.

India has become an attractive market for retailers because it has a population of over 1billion, solid economic growth, and a growing middle-class. The challenge to retailers here is that a majority of consumers prefer small, family-owned shops. Three opportunity dimensions – growth, risk, and market size – are used to portray the top 30 countries. The U.S., U.K., Taiwan, and Malaysia fall in the ―Best Opportunity‖ quadrant of the diagram, with Australia and Canada just on the fringe of the quadrant.

Moving into global markets requires all the same success factors as opening up any store – a good strategy that is sustainable, a strong financial position, and a little luck.

However, global expansion requires much more. To succeed in global expansion, retailers must:

·         Act like they are local and understand their customers’ needs,

·         Understand and act appropriately in response to subtle nuances between markets and countries,

·         Ensure their timing is right, and

·         Be selective.

D. Entry Strategies

Four approaches that retailers take when entering non-domestic markets are direct investment, joint venture, strategic alliance, and franchising.

1.     Direct Investment- Direct investment involves a retail firm investing in and owning a division or subsidiary that builds and operates stores in a foreign country. This entry strategy requires the highest level of investment and exposes the retailer to significant risks, but has the highest potential returns.

2.     Joint Venture- A joint venture is formed when the entering retailer pools its resources with a local retailer to form a new company in which ownership, control, and profits are shared.

A joint venture reduces the entrant’s risks. The local partner understands the market and access to resources – vendors and real estate.

Problems with this entry approach can arise if the partners disagree or the government places restrictions on the repatriation of profits.

3.     Strategic Alliance- A strategic alliance is a collaborative relationship between independent firms. For example, a foreign retailer might enter an international market through direct investment but develop an alliance with a local firm to perform logistical and warehousing activities.

4.     Franchising- Franchising offers the lowest risk and requires the least investment. However, the entrant has limited control over the retail operations in the foreign country, profit potential is reduced, and the risk of assisting in the creation of a local domestic competitor is increased.

Strategic Retail Planning Process-

The strategic retail planning process is the set of steps that a retailer goes through to develop a strategic retail plan. It describes how retailers select target market segments, determine the appropriate retail format, and build sustainable competitive advantages. The planning process can be used to formulate strategic plans at different levels within a retail corporation.

Step 1: Define the Business Mission- The mission statement is a broad description of a retailer's objectives and the scope of activities it plans to undertake. It should define the general nature of the target segments and retail formats that the firm will consider. In developing the mission statement, managers must answer five questions:

(1) What business are we in?

(2) What should be our business in the future?

(3) Who are our customers?

(4) What are our capabilities?

(5) What do we want to accomplish?

Step 2: Conduct a Situation Audit- A situation audit is an analysis of the opportunities and threats in the retail environment and the strengths and weaknesses of the retail business relative to its competitors.

A situation audit is composed of four elements: market factors, competitive factors, environmental factors, and strengths and weaknesses analysis.

1.     Market Factors- Some critical factors related to consumers and their buying patterns are market size and growth, sales cyclicality, and seasonality. Market size, typically measured in retail sales dollars, is important because it indicates a firm's opportunity for generating revenues to cover its investment. Large markets are attractive to large retail firms, but they are also attractive to small entrepreneurs because they offer more opportunities to focus on a market segment. Growing markets are typically more attractive than mature or declining markets. In general, markets with highly seasonal sales are unattractive because a lot of resources are needed to accommodate the peak season, but are underutilized the rest of the year.

2.     Competitive Factors- The nature of the competition in retail markets is affected by barriers to entry, the bargaining power of vendors, and competitive rivalry. Retail markets are more attractive when competitive entry is costly.

·         Barriers to entry are conditions in a retail market that make it difficult for firms to enter the market. These conditions include scale economies, customer loyalty, and availability of locations.

·         Scale economies are cost advantages due to a retailer's size. Markets dominated by large competitors with scale economies are typically unattractive.

·         Retail markets dominated by a well-established retailer that has developed a loyal group of customers offer limited profit potential.

·         The availability of locations may impede competitive entry.

·         A retail market with high entry barriers is very attractive for retailers presently competing in that market, but unattractive for retailers not already in that market.

·         Another competitive factor is the bargaining power of vendors. Markets are unattractive when a few vendors control the merchandise sold in it. In these situations, the vendors have an opportunity to dictate prices and other terms, such as delivery dates, and thus reduce the retailer's profits.

·         The final industry factor is the level of competitive rivalry in the retail market, which is the frequency and intensity of reactions to actions undertaken by competitors. Conditions that may lead to intense rivalry include: (1) a large number of competitors that are all about the same size, (2) slow growth, (3) high fixed costs, and (4) the lack of perceived differences between competing retailers.

3.     Environmental Factors- Environmental factors that affect market attractiveness are technological, economic, regulatory, and social changes.  When a retail market is going through significant changes in technology, present competitors are vulnerable to new entrants that are skilled at using the new technology. Some retailers are more affected by economic conditions than others. Government regulations can reduce the attractiveness of a retail market. Finally, trends in demographics, lifestyles, attitudes, and personal values affect retail markets' attractiveness.

4.     Strengths and Weakness Analysis- The most critical aspect of the situation audit is for a retailer to determine its unique capabilities in terms of its strengths and weaknesses relative to the competition. A strengths and weaknesses analysis indicates how well the business can seize opportunities and avoid harm from threats in the environment.

Step 3: Identify Strategic Opportunities- After completing the situation audit, the next step is to identify opportunities for increasing retail sales. The strategic alternatives are defined in terms of the squares in the retail market matrix.

Step 4: Evaluate Strategic Opportunities- The evaluation of strategic opportunities identified in the situation audit determines the retailer's potential to establish a sustainable competitive advantage and reap long-term profits from the opportunities under evaluation.

Thus, a retailer must focus on opportunities that utilize its strengths and its area of competitive advantage. Both the market attractiveness and the strengths and weaknesses of the retailer need to be considered in evaluating strategic opportunities. The greatest investments should be made in market opportunities where the retailer has a strong competitive position.

Step 5: Establish Specific Objectives and Allocate Resources- The retailer's overall objective is included in the mission statement. The specific objectives are goals against which progress toward the overall objective can be measured.

Specific objectives have three components: (1) the performance sought, including a numerical index against which progress may be measured, (2) a time frame within which the goal is to be achieved, and (3) the level of investment needed to achieve the objective.

Typically, the performance levels are financial criteria such as return on investment, sales, or profits.

Step 6: Develop a Retail Mix to Implement Strategy- The next step is to develop a retail mix for each opportunity in which investment will be made and to control and evaluate performance.

Step 7: Evaluate Performance and Make Adjustments- The final step in the planning process is evaluating the results of the strategy and implementation program. If the retailer fails to meet its objectives, reanalysis is needed. This reanalysis starts with reviewing the implementation programs; but it may indicate that the strategy (or even the mission statement) needs to be reconsidered. This conclusion would result in starting a new planning process, including a new situation audit.

Summary

·         A retailer’s long-term performance is largely determined by its strategy. A strategy coordinates employees’ activities and communicates the direction the retailer plans to take.

·         Retail market strategy describes both the strategic direction and the process by which the strategy is to be developed.

·         The retail strategy statement indicates an identification of a target market and the retail format (its offering) to be directed toward that target market. The statement also needs to indicate the retailer’s methods to build a sustainable competitive advantage.