Considerations on Digital Transformation in Retailing
This article presents our thoughts about digital transformation in the retail sector. Recently, we were at Silicon Valley for the second time leading a group of executives from the Brazilian retail industry, for an immersion course in innovation and digital transformation in retailing. This experience resulted in several considerations, which are described below.
Customers do not relate to channels, but to brands. They move across channels to compare the options available, and decide where and how to buy. The retail industry must progress in its digital transformation agenda with an eye to changes in the behavior of consumers. It is through the analysis of micro-moments, and the needs, desires and demands thereof, that the retail sector will evolve to integrated business models that know and understand customers, and dominate products and information processes and management.
Digital transformation is, in fact, organization and cultural transformation. Digital transformation does not take place only through the incorporation of new technologies, but through a change in the way that people understand the relationship between the brand and the customer, enterprise processes and the use of technology and the digital world.
Digital transformation implies fundamentals, and it takes place through the development of a digital culture. The success of cultural change must be a strategic directive agreed between the board of directors and the executive board and proposed in a top-down manner. We must reconsider the management model in order to engage people. This process must be made with a focus on consumers and on how to generate more value for them. Companies must view the flow of products and customers of their business; set up their systems architecture and infrastructure; and follow the learning curve in electronic commerce and digital communication.
Digital transformation should not be seen as a project, but as a journey that starts but does not end, since innovation will require permanent reviews and improvement of processes and the evolution of the business model. Progressive maturing and good practices allow us to consolidate the critical success factors described below:
In the digital world, customers want to purchase brands from several contact points without having difficulties in their shopping experience. In order to offer this “good” purchase experience to customers, retailers must “see” their inventories in real time and across different branches and channels, as well as recognize and monitor each customer at different points of contact. The so-called “omnichannel retail” requires a strong technology and data infrastructure. The investment needed in data storage, information security and data communication is not small, and is another element that determines the success of digital transformation in retail companies.
The world is undergoing a digital revolution that is boosted by smartphones and their increased presence in people’s daily lives. In accordance with figures released by the Ministry of Communications, 55% of Brazilians over 10 years of age (or 96.4 million people) have access to the Internet, against 65.9 million at the beginning of the decade. Intensity and form of use are as important as access: a survey conducted by Google shows that people search for information on their mobiles approximately 150 times per day. For many, mobiles are their “first” screen, or their primary form of interaction with the world. If mobiles are so present in the day-to-day lives of people, it is not surprising that the world’s major companies are from the digital business sector, such as Apple, Google, Amazon and Uber.
The core of digital innovation is mobility. Consumers spend more time connected to mobile devices. They move across channels, relate to each other, get information and make the most of their digital purchases (this already happens in the USA, the United Kingdom and China). Applications and mobile websites will be the basis of communication, relationship and interaction between brands and consumers, inside or outside the stores. Another crucial aspect of mobility is its capacity to remove difficulties from processes, empower store staff and improve productivity. The best example is Apple Store, in which the Isaac platform enables sellers to manage queues; check inventories; separate products; scan items; process sales, replacements and repairs; recommend complementary products; sell services; receive payments through payment means; and sell in other channels.
The digital world challenges companies to have decision-making processes based on data and analyses. This is a cultural change that will require new competencies and skills. At Google’s headquarters, the phrase “data beats opinion” is often heard at meetings. Behind this phrase, there is a concept that is essential for the success of digital transformation: the use of data in all decision making processes of retail companies. Pricing, promotion, assortment, purchasing and expansion decisions will be more and more based on data. The use of data requires transforming it into information, which generates decisions that, in turn, will generate results. However, there is a barrier in retail companies: the lack of a data-driven culture. many decisions are based on intuition and opinions, which causes delays and difficulty in digital transformation. Please note that startups and “digital native” businesses are not affected by this problem, growing through faster and more accurate decision-making processes.
All projects and initiatives must be continuous and fast and use prototypes to gain momentum. In the digital world, speed is more important than perfection. “Correct errors” must be stimulated, as well as the capacity to check concepts quickly and with low risk for the company.
In the digital environment, it is very difficult to learn everything by oneself. The speed and extent of innovation leads companies to open up and share information with each other. This includes getting closer to startups, since they are able to accelerate and simplify the solution of problems that the bureaucracy of established business usually makes more complex. Such collaboration may lead to mergers and acquisitions, such as those made by Walmart in the USA (Jet.com and Bonobos, among other).
The Internet of Things (IoT), virtual reality, augmented reality, artificial intelligence and machine learning challenge the retail industry to decode technologies and use them to increase productivity and generate value for customers. However, none of them will have the impact of conversational commerce, which gathers voice recognition devices and artificial intelligence.
Platforms such as Alexa, of Amazon; Siri, of Apple; Cortana, of Microsoft; and Google Now, will change the way that people relate to and interact with the digital world. Difficulties will be reduced to minimum levels, and the voice will be the principal interface for access to the digital world. Intelligent machines will be able to interpret requests and learn through their interaction with users. The company that has advanced most in terms of conversational commerce applications in retailing is Amazon. It has already set up its Alexa system in domestic devices, such as Echo, and devices that reduce difficulties and provide an enhanced experience in categories such as fashion (Echo Look) and food items (Dash Wand).
At the beginning of the digital transformation process, we thought that we would have to deal with the “showrooming” phenomenon, in which customers would use physical stores to search for and find out about products, and then make their purchases online for the lowest price available. No doubt this is happening, but to a lower extent than expected. On the other hand, the inverse trend is also growing, or the so-called “webrooming,” in which customers search for products online and go to physical stores to complete their purchases.
US retail flow data (physical stores) have decreased a lot, but physical retail sales are not falling in the same proportion, which evidences the thesis that customers are going to shopping malls and physical stores to purchase products, and the Internet is being more used as a source for searching, understanding and introducing products and services.
This relationship between physical retail and online retail is called “O2O” (Online to Offline). Simple examples, like customers searching for the address, phone, and opening and closing times of physical stores, are becoming more common in this relationship between the physical and virtual world. Physical retailers are using digital media and digital strategies to attract the public to their stores, while online retailers are using physical stores as a solution for delivering and replacing products. This relationship between physical and digital retail should increase a lot in the coming years, and the purchase of Wholefoods by Amazon reinforces this idea.
The technology world is being transformed by cloud computing and the prevalence of service-based business models. The retail sector must be open for questioning its business models. Apple has set up a services business (Apple Enterprise) to sell its 3os technology, which captivates consumers at its stores. Westfield, a shopping malls operator that pioneered digital transformation, set up a digital services business to explore the knowledge gained. Companies such as Staples and Best Buy have changed the way their business generates income and results. Magazine Luiza (a Brazilian retailer) defines itself as a digital company with physical stores, and plans to use a multichannel marketplace business model.
A common mistake of most companies is to believe that they will be able to carry out digital transformation based on digital initiatives and technology investments. Engaging a digital marketing agency, participating in social networks, or developing e-commerce operations are important steps. However, they will fail in the absence of a digital culture on which these initiatives can be structured and built. Peter Drucker once said that “culture eats strategy for breakfast.” This means that, without strong and preliminary actions for development of a digital culture, any digital initiative, no matter how good it is, will probably fail.
But how to build a corporate digital culture? In his book “Competing for the Future,” C.K. Prahalad defines the concept of “organizational competencies.” For him, this is a set of skills and technologies that make an organization able to offer benefits to its customers. Organization competencies generate values perceived by customers; differentiate the organization from its peers; and can be expanded. Thus, they have a material impact on the growth potential and competitive advantages of a company in the market. Accordingly, a digital culture must be treated as an essential asset for organizations, operating in contracting processes, strategic initiatives and assessment of executives.
To develop the digital culture as an organizational asset, one must dive into the digital world. For this reason, the company must encourage its employees (particularly the executives) to adopt digital habits. Using Uber and the Airbnb hotel platform; accessing contents on YouTube; keeping accounts in social media. These small, simple steps are important to make people adopt a digital culture and change their behavior and habits and, gradually, to make corporate transformation feasible.
The greatest challenge of digital culture is the fact that managers of traditional companies are “analogic” and, for this reason, they do not have a digital mental model. Instead of “digital natives,” they are “digital immigrants” who are adapting to a new reality. On the other hand, younger “digital native” employees do not have experience in management, leadership and strategy, although they are familiar with the tools required to implement cultural transformation. For this reason, managers need to learn from young employees, and vice-versa. The work environment contributes to cultural change. Rotating spaces, no rooms, executives integrated into their teams, offices that look like university campuses or a “garage” are common examples in Silicon Valley. The work environment of coworking spaces and accelerators reinforces this idea. Startups say that new ideas, innovation and disruption take place in environments like these.
Digital culture is a decisive element for companies in the retail and many other segments, within a process of disruption and innovation that is already present, but which, certainly, will only gain momentum in the coming years. Companies that know how to deal with digital culture as the basis of their DNA, and are able to move fast within this process, have greater chances of striving for and achieving a successful digital transformation.
Rethinking the organization structure
The basis of a digital culture leads to important discussions regarding new organizational structures. In Silicon Valley, it is clear that even large corporations are migrating to lighter, more collaborative and flexible organizational structures with less hierarchical levels and bureaucracy. To conceive digital transformation without a new organizational structure is like raising a new building over old foundations.
And this might be one of the most complex and obscure challenges. Companies with modern management models, such as Spotify, Google and most startups, do not have a common model. But the fact is that the characteristics listed above, such as collaboration, flexibility, lightness, speed and less hierarchy are present in all successful cases of new organizational structures.
It is also clear that the changes to be made in companies of the so-called “old economy” must be gradual and have an “evolution” format, rather than a “revolution” format. In this way, the corporate culture and people will be able to absorb and understand the new model. However this is not true in cases where the sector is under a threat of rupture due to new business models, and companies must undergo radical transformation in order to survive.
Digital transformation is far more comprehensive than just using online sales and multiple channels. It involves rethinking the way a brand communicates with, relates to and serves its customers, its organizational design and culture, and the evolution of its business model. Companies like Apple, Sephora, Walmart, Nike, Panera Bread, Magazine Luiza, Boticário, Reserva and Bob’s have understood the challenge and its extent. The retail industry will continue to be challenged by Amazon and other companies that are obsessed with consumers and have a strong digital culture. Retailers must break the inertia.
Alberto Serrentino – founder of Varese Retail and author of the book “Varejo e Brasil: Reflexões Estratégicas.”
Eduardo Terra – managing partner of BTR Educação e Consultoria and chairman of SBVC – Sociedade Brasileira de Varejo e Consumo.