Several ransquawks...

"a society [or corporation] only thrives if you allow people to give the best of themselves."
   - Roberto d'Alimonte

In the present depression recession, when current employees are under severe pressure to produce, is that really going to happen?

Retailing Follow-Up

Comments Concerning Retailing Strategy

All strategies have inherent risks. A do-nothing strategy has perhaps the greatest degree of risk – the competition will move forward. A me-too strategy guarantees parity with the competition at best - but not if they execute better. And strategies, by their very nature, do not admit of experimentation and validation before-the-fact. They contain assessments, judgements, and decisions based on probabilities, not certainty. So, yes, they are guesswork.

In "The Halo Effect" Phil Rosenzweig identifies four areas of risk.
First – the Customers. Will they behave as anticipated?
Second – Business Competitors. What strategies are they about to pursue?
Third – the Company itself. How will the company respond internally to the strategy? Can it be executed profitably?
Fourth – Technological change. Never assume that the environment will not change. (Rosenzweig, 2009)

The first three above constitute the traditional C3 model of Company, Customer, Competition. Of these, only the first is moderately controllable; the others can only be guessed at probabilistically.

Michael Porter at Harvard makes a simpler classification: there are only two aspects – strategy and execution. This duality underscores the huge impact of the internal operation of a company. Many companies may not be able to implement the investment strategy outlined in the previous post. Numerous obstacles may hinder profitable implementation - staffing inadequacies (lack of training personnel, for example), systems inefficiencies, and misallocation of resources among them. Managers may be afraid to invest the time, money, and effort required. There may be "Cargo Cult" analysis that will obfuscate thinking. (The term "brand aspirational" comes to mind. Aren't all customers "brand-aspirational"?) And there is always the law of unanticipated consequences.

Is the strategy retailing strategy outlined in the previous paper risky? Of course!

But this is true of any strategy. All strategies are risky. Managers are paid (and hopefully trained) to assess the probabilities, judge the risks, and evaluate these obstacles. And to make the decisions – to take the risks.

Retailing: The Contrarian Strategy

Will this recession represent the cusp that will create paradigm-shift in consumer behavior?

NO! In fact, quite the opposite. It creates major opportunities. A large window of opportunity exists.

So long as unemployment remains moderate, and overall household incomes fall slowly, consumers' behavior will also change in line with overall discretionary income. Of course, elasticity curves will change shape, and there will be difficulties in ascertaining the shapes. Some products will move from inelastic to elastic demand. There will be fewer units pre transaction. Dollar values per transaction will decrease. Product choices will change. This will continue over at least two more years.

But fundamental consumer behavior will remain the same. Customers will still demand value, albeit at the lowest price-point possible. On major retailer estimates that half of their customers are either brand-aspirational, or affluent but price-sensitive. These consumers will still expect service as part of the value equation. What should not happen is, as quoted from the Globe and Mail "you still don't want to go into a Wal-Mart, not find any help, not find the goods you want, and wait 20 minutes at the cash."

Now is the ideal time to build market share based on loyalty – a loyalty that will carry through the recession into the following recovery. This is loyalty based not on price, but on customer service.

The standard defensive posture involves cutting costs. Usually this means cutting staff payroll. But from a strategic perspective, this has four major drawbacks.
First - cost-cutting ruins customer service. The more you cut, the less service you provide. This builds business based on price alone. It does not build loyalty
Second - cutting staff means losing some of your better people. When the recovery begins, you must replace them – with less-experienced, less-qualified staff. And at a dollar cost.
Third – recessions create insecurity, and managerial insecurity leads to micro-management. Managers avoid risks, do what is safe, do what they think they know. In short, they regress. This is especially true of mid-level managers, who are the most insecure. Insecurity is also a poor motivator.
Fourth – the defensive posture reinforces the status-quo. By default, it determines that there will be no significant change in the market positions of the competitors.

Instead, go on the offense. Invest.

First: Invest in your customers.

This must be done in several ways:

First – hold the line on prices. Customers will become more price-aware, and more price-sensitive, as the recession progresses. They will rebel if they see unreasonable price increases. (Witness the reaction of TD Bank customer when presented with an unreasonable service charge on lines of credit.) Customers view gasoline prices as a proxy for transportation costs, and believe that general costs should decrease in line with their incomes.
Second - consider extending credit to your regular customers for durable goods. It will enhance sales (if not profits) and generate loyalty. Higher rates of risk must be accepted, but will be offset in the long-run by customer retention.
Third – retain adequate staff to provide optimum customer service.


Second: Invest in your staff.

Hire, schedule, train, and communicate.

First - Hire staff to ensure adequate coverage of the sales floor. In most cases, you will now have a larger pool of candidates to choose from, and they will be more qualified than usual. Maximizing customer service may require only a marginal increase in staff. (As an alternative, schedule your existing staff more intensively.)
Second - Pay attention to scheduling. With increasing periodicity of purchasing careful scheduling will provide maximum floor coverage of existing staff. Make the most of what you already have. Your customers will be more loyal, and so will your staff. (Loyalty is function of security, not fear.)
Third - Allocate time to training existing staff. Make your remaining staff more effective with customers. Work on effectiveness, rather than efficiency. Instill a feeling of security. Emphasize opportunities.
Fourth - Communicate. Tell your staff the truth. (They probably know already.) Tell them what is happening, what will happen and what to expect. Be open and be positive. Build security.
Fifth - Emphasize psychic income. It costs nothing. It instills loyalty and motivation. Be very public about staff awards to spread the sense of security. And motivation.

A Caveat: The strategy hinges on several assumptions. First, there is a direct relationship of customer-satisfaction to revenue. Second, at this point the slope of the marginal revenue curve is greater than the slope of the marginal expense curve. (It would seem self-evident that there is a cusp, below which poor customer service creates a drastic drop-off in both customer satisfaction and revenue.) Or put another way, the slope of marginal revenue-marginal cost curve is <> 1 and marginal costs exceed marginal revenues. In this case increased volumes only exacerbate the problems. Third, the balance sheet will sustain an offensive strategy.

Operationalizing

1. Institute training programs, both managerial and low-level staff.
2. Compensation - alter managerial compensation to include measures of transaction volume, market share, customer satisfaction, and staff training.
3. Pricing – maintain price-points if possible; cut margins on cash-cows, especially if perceived as discretionary purchases; lower price-points on specials, especially fads. Avoid price wars – no-one wins.
4. Product - allow more purchases of items at local levels; localize product lines; search for special purchases from suppliers; do data mining to determine concordances; substitute product lines; but only if perceived as equal or better value. For low-end retailers, deepen lines upward in price-point. For high-end retailers, deepen the product line to lower overall price-points, but retain quality levels. For mass retailers, decrease product-line depth and increase breadth. Use ideas from staff to improve product lines (data mining will not accomplish this), but be sure to visibly reward contributions from staff.
5. Supply - develop multiple supply channels; establish relationships with on-shore suppliers (promote this aspect), or better, local suppliers; establish long-term contractual alliances with suppliers.

Small Retailers

The good news for small retailers is this: the big companies will actually do very few, if any, of these things. The strength of will is not there. Lower and mid-level managers will avoid risk-taking. At higher levels, with shareholders and analysts watching, the willingness to forgo profits in favor of market share will not materialize. Short-term results are the order of the day.
This strategy that must be implemented from the top down, so that risks can be taken at all levels. As such, it is ideal for smaller retailers with strong involvement by management. Analyze your distinctive competence. What is your competitive advantage relative to the "big guns"? Cost? Location? Product lines? Service? Emphasize them. Take heart – you will thrive.

Summary: Conceptually, the strategy is "Retailing Reaganomics" – outspend the competition when they are fearful and contracting. Much of the cost of execution is in "soft costs". Actual cash outlay is small.

A window exists now which will last for at least another year. But the strategy must be executed soon. The correct strategy implemented late quickly becomes the wrong strategy.