Building for breakthroughs The leadership of innovation in UK retail

As the UK suffers its worst trading environment since the Great Depression, British retailers that fail to innovate risk being overtaken by competitors, or fighting for survival. Chief executives in the sec-tor know this and are striving to accelerate the generation and implementation of new ideas.

Many retailers are working apace to capitalise on innovation, yet others might best be described as ‘tinkering’ at the margins. Korn/Ferry Whitehead Mann interviewed 30 chief executives from leading British retailers and fast moving consumer goods (FMCG) companies and found that many seem to be optimising existing products and services rather than reinventing themselves with breakthrough ideas (with some notable exceptions). However, signs of reluctance to steer resources directly into innovation efforts were unveiled: There was no formal budget for innovation at 70 percent of the retailers surveyed, and 80 percent had no dedicated innovation function, team or leader. Only 50 percent of retailers were proactively recruiting and developing innovation skills in their businesses. Although retail has many impressive examples of ingenuity—especially in customer services and multi-channel sales—our findings suggest a lack of focus that may be hampering progress at the pace required to thrive (and survive) in today’s economic climate.

Investment in innovation has never been more important. Personal technology is driving change at a dizzying rate. Customers expect the same brand experience across all channels, including mobile. Comparative shopping is a mouse-click away. Advertising and marketing are undergoing tectonic shifts. At the same time, manufacturers and wholesalers have themselves entered the e-commerce market (and in some cases bricks-and-mortar as well), creating a whole new class of competitor. How to grow the base of consumers, especially in a dismal economic climate? “Lots of small, innovative things can help you win market share,” said Melissa Potter, Chief Executive, Clarks International.

March 2012

Retailers have three levers of innovation: products, service, and ways of working. With traditional retailing upended, companies today must push all three simultaneously. But to do so, they must dedicate talent and resources to creating the new and different. Multi-channel is the focus of much innovation, and will likely produce the sector’s next chief executives.

By Sally Elliott, Ben Twynam, and Sian Connell

Sally Elliott, Senior Client Partner andHead of Retail, presented this research at Retail Week Conference, in March 2012.

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As traditional retail models are upended, retail businesses must be smarter about the talent and leadership they need. The next generation of chief executives will certainly require deep understanding of the multi-channel environment in addition to the vision, commercial acumen, analytical, and leadership skills they have needed to date. But above all that, they will need to create an innovation culture.

Three paths to innovation: products, service, ways of working

Simply put, innovation is about finding new things to do and new ways of doing them. Yet innovation is folly if it doesn’t deliver value.

“You’ve got to be equally good at generating and implementing ideas,” said Angela Ahrendts, Chief Executive of Burberry.

Product is the most obvious area for innovation in retail, but the biggest gains may come from service and operational improvements. Retailers’ daily interaction with customers puts them in prime position to glean, test, and implement new ideas at a rapid pace—and the right ones pay off quickly. The developments of click-and-collect services, m-commerce, and price optimisation software, for example, have been more pivotal than any single product. In fact, more than half of retailers spoken to for this report said that their biggest innovation in the last few years had been in service, compared to 30 percent who referred to product.

Figure 1

Which best describes your company’s biggest innovation from the last few years?

30% Product

15% Ways of working

55% Service

Innovation and creativity are the lifeblood of retail.”

Jim McCarthy Chief Executive, Poundland

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The most forward-thinking retailers recognise that three levers of innovation—product, service, and ways of working (e.g., culture, business processes, operations)—are all needed to drive a business forward. That marks the retail industry out from the FMCG sector, where product innovation dominates. One FMCG executive spoken to for this report said that at their company, innovation meant “any new product that carries a bar code that is new to the industry”—a very narrow definition.

By contrast, retailers need to ensure that they are driving innovation in its broadest sense. “Product is a small part of innovation,” said one chief executive. “Innovation is all about ways to engage the customer... store, website, human/non-human.”

Alan White, Chief Executive of N Brown said that even in the product realm, innovation can be hard to define precisely. “It can be a new product, or using a celebrity in a campaign, or going into a new market, or using a new channel. There is rarely one eureka moment.”

Examples of recent successful product innovations in retail include:

Own-brand products: Grocers’ own-label offers have been a vital tool during the economic downturn, but such strategies also helped protect margins for JD Sports with its McKenzie label, and create loyalty at Pets at Home through its Wainwright’s brand of dog food. Kingfisher anticipates that the majority of revenues will come from its ten core own-brand products by 2020.

Improved functionality: Whether it’s B&Q’s “Click Together Tiles” or McBride’s “24 hour germ kill” technology, making life easier or more convenient for customers pays off.

Product extensions: Examples include PepsiCo’s launch of Walkers Crinkles crisps and Unilever’s Marmite brand extended from spreads to new flavoured nuts and biscuits.

Adaptation for new consumers: N Brown attracted new customers with its boots shaped to fit those with a wider calf.

Innovation is all about ways to engage the customer... store, website, human/non-human.”

Chief Executive

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Service innovations are increasingly important differentiators, and can contribute to much-coveted customer loyalty. Fortunately, retailers’ direct contact with shoppers provides near-endless opportunities to glean information, test ideas and implement new services. They can create an emotional connection, convenience, or even a memorable shopping experience—like a pop-up version of the French Laundry restaurant at Harrods. “Most people don’t want to go shopping, they want to be entertained,” said Michael Ward, the Managing Director of Harrods. In short, service innovation is possible at every point retailers engage their customers, from social networking sites to point of sale at the till.

What is clear from our conversations with chief executives is that much of this change is underpinned by technology, which is leading to faster, more convenient, and more bespoke services for shoppers. It is the IT and e-commerce functions, as well as the buying and trading teams, that are commonly driving new service ideas, such as:

Multi-channel: Collection services, in-store kiosks, m-commerce, and cross-channel services via loyalty schemes are knitting the online and offline retail experience together.

Delivery: Fashion retailer Aurora upped expectations in the home shopping market with its 90-minute delivery service.

Price-comparison: Asda’s MySupermarket allowed customers to price-check products against rival grocers.

In-store experience: Dixons adapted Apple’s approach by providing “play tables” for customers to try out gadgets, games, even kitchen appliances in-store.

Point of sale: Poundland adopted left-handed tills to deliver a faster checkout. Boots is using loyalty card customer data to tailor interactions with shoppers at the point of purchase.

Technology can also lead to innovation in “ways of working”, for example, those changes that streamline business processes, hone operational strategies, or improve internal communications.

The economic downturn, combined with rising commodity and staffing costs, has forced retailers to scrutinise their operations to find more efficient and effective ways of working. But those small changes can add up to a win. “Most innovations are not about completely engineering something,” said Geoff Cooper, Group Chief Executive of Travis Perkins. “It’s about one degree of difference to give you an edge over your competitors.”

Most innovations are not about completely engineering something. It’s about one degree of difference to give you an edge over your competitors.”

Geoff Cooper Group Chief Executive, Travis Perkins

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Operational innovation often emerges from employees, suppliers or partners who are focused on a particular part of the supply chain. Asda, for example, worked with its logistics partners to cut total road miles by lengthening trailers. Not only did this bring down operating costs, but it also reduced Asda’s carbon footprint.

The most progressive retail leaders make it clear that anyone and everyone can contribute to one of these three paths of innovation. Innovation is a stated strategic goal. It is understood by all stakeholders to be a key driver of performance. It is backed up by appropriate resources to translate goals into results. Most importantly of all, senior leaders in the business consistently reinforce its importance and encourage all employees to constructively challenge the modus operandi.

“Innovation is integrated into every aspect of what we do – consumer concepts, ways of working, communication, connectedness, culture,” said Ahrendts of Burberry.

Leading innovation in retail

A culture of innovation needs to emanate right from the top of the business, but not stop there. More than half of the retail leaders Korn/Ferry interviewed (55 percent) said that the responsibility for leading innovation lies with the chief executive. Indeed, those business leaders might create the right structures and environment—but cannot hold sole responsibility for innovation. Ideas must bubble up from many layers of the enterprise.

Retailers don’t generally ensure that innovation is formally governed. Only one in our survey group (Kingfisher) had appointed an innovation director. Twenty percent of retailers surveyed had created a team with formal responsibility for leading innovation.

“The creation of ‘labs’, operating separately from the core business, has provided space to experiment with new ideas around own-brand, formats and ways of working,” said Gordon Mowat, Group Strategy Director at Wm Morrison.

Other retailers assigned responsibility for innovation, either wholly or jointly, to the strategy, marketing, or buying director. Our findings concur with a 2008 study published in McKinsey Quarterly on leadership and innovation, which summed up: “While senior executives cite innovation as an important driver of growth, few of them explicitly lead and manage it.”

Retailers don’t generally ensure that innovation is formally governed. Only one in our survey group (Kingfisher) had appointed an innovation director.

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Likewise, only 30 percent of retailers devote specific budget to innovation, compared to 80 percent of FMCG companies. Only 20 percent of retailers have a specific innovation function within the

business. By contrast, all the FMCG companies Korn/Ferry spoke to had specific teams focused on building a pipeline of innovations.

Building innovation into the strategy, management structure, and performance indicators is the best way to ensure that good ideas aren’t just generated, but are also well executed. “In the UK we have an ideas culture. However, the grinding part of innovation is taking an idea and making it work,” said John Browett, the Dixons Chief Executive who was named Senior Vice President for Retail at Apple in January 2012. “The value is most often found in the execution and not the idea itself.”

The majority of business leaders Korn/Ferry spoke with admitted that their business was better at producing ideas than getting them into the field. Retail leaders gave their companies an average score of 7.8 out of 10 on idea generation. But implementation? The average score was 6.6.

The rise of multi-channel

A new buzzword has emerged—‘omni-channel’ retailing—in which the customer experience is integrated across stores, websites, direct mail and catalogues, mobile platforms, social networks, home shopping, and gaming. The multi-channel function is becoming central to retail, and organisation structures are changing to reflect that.

Experts now believe “digital information” influences nearly half of store sales. According to a December 2011 report in the Harvard Business Review, digital retailing now accounts for about 10 percent of sales in the UK, 9 percent in the United States.

Today, the role of multi-channel director typically includes profit-and-loss responsibility for sales over the Internet. But that individual is also tackling the challenge of integrating mobile, Internet, and telephone sales with stores. He or she is working with IT, marketing, product, supply chain and store teams to ensure that the brand experience remains consistent and the organisation is equipped to meet customer expectations. As a result, the multi-channel director is pulling the strings on much of the leading-edge innovation in retail at present.

In the UK we have an ideas culture. However, the grinding part of innovation is taking an idea and making it work.”

John Browett Chief Executive, Dixons Retail

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Only 30 percent of retailers devote specific budget to innovation, compared to 80 percent of FMCG companies.

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The remit of the multi-channel director appears likely to continue to expand, so that they will oversee every aspect of the customer journey—including strategy, brand, and all sales channels. In the years to come, this will emerge as a starring role. Expect the team reporting to the retail chief executive to comprise: finance, product, infrastructure (IT and supply chain), and multi-channel. The de-facto No. 2 role will be the multi-channel director.

As a result of the growing importance and elevation of the multi-channel director in retail, the role is emerging as the most likely route to becoming chief executive of a major retailer. The experience and skills gained in that role will take precedence over expertise in any other individual function such as store operations, buying, or marketing.

In the UK today, there are simply not enough retail executives who combine true technical understanding with leadership experience. As a result, Korn/Ferry is seeing greater mobility among this kind of executive than for any other function in the consumer sector. Seven out of ten of the nation’s leading retailers with significant e-commerce and multi-channel operations have changed the leadership of that function since late 2010. Among the string of appointments:

> Argos and Mothercare brought in chief executives without traditional retail experience, but with significant e-commerce and multi-channel knowledge and capabilities.

> Marks & Spencer recruited Laura Wade-Gery (Tesco’s e-commerce director) to become Executive Director, multi-channel e-commerce, and put her on the board.

> Dixons promoted Katie Bickerstaffe, whose previous remit included e-commerce, to become Chief Executive UK and Ireland.

> Dixons Chief Executive, John Browett, who is one of the rare chief executives with first-hand online experience (having set up tesco.com) has been appointed SVP Retail for Apple.

As a result of the growing importance and elevation of the multi-channel director in retail, the role is emerging as the most likely route to becoming chief executive of a major retailer.

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The strategic importance of multi-channel is also recognised by retail chairmen. In the last year, 23 percent of non-executive directors appointed to the boards of FTSE 350 retailers had online experience. This represents a marked increase from the same period five years ago, when only 7 percent of NEDs taking up new board positions had such experience.

How chief executives can build innovation capability

Innovation does not happen without the right mix of people and skills. According to our study, only half of UK retailers specifically recruit and develop staff with the aim of increasing innovation in their organisations (as compared to 100 percent in FMCG). Building a culture of innovation begins with recruiting and developing the right people as well as working hard to reward and retain them.

Retailers should start with a clear understanding that creating the new and different and managing innovation are both skill sets that are in low supply and take time to develop. One in four global retail leaders surveyed for Korn/Ferry’s 2010 report, “What’s in Store?” named “creating the new and different” as a critical competency gap in their executive teams. Furthermore, Korn/Ferry research shows that innovation skills are amongst the hardest to develop (Lombardo, M. M. & Echinger, R. W. 2007). Retail leaders need to identify those individuals on their teams who already exhibit these competencies and give them assignments that let them flex and stretch those muscles, such as:

> Chair projects or lead task forces to develop leadership skills.

> Work in turnaround areas that require fresh thinking and approaches.

> Take on new roles that are cross-function, markets or channels.

> Launch a new product, service, or process.

> Build and lead an innovation team, including making the business case for the value of innovation.

> Challenging assignments that include tight timetables, tight budgets, and strategic as well as tactical issues.

Within HR, the development and recruitment functions also need to select candidates based on these key skills and then integrate them throughout the organisation. “We wouldn’t recruit a general manager

We wouldn’t recruit a general manager who didn’t embrace an innovation and change-management mindset.”

Ian Cheshire Group Chief Executive, Kingfisher

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who didn’t embrace an innovation and change-management mindset,” said Kingfisher Group Chief Executive Ian Cheshire. In addition, retailers should look for candidates who:

> Have a track record that includes: generating and implementing new ideas; leading change; and taking qualified risks.

> Question, experiment, research, analyse, yet are willing to make decisions without knowing everything.

> Can communicate new ideas, engage all stakeholders, and collaborate across the business.

> Have or want a profile as an innovative leader, and spend their personal time creatively.

> Can ‘blue sky’ think and are interested in what the future could be.

Once those processes have been put in place, companies need to recognise and reward those who are generating ideas at all levels. Innovation efforts need to be tracked and made a clear element of measuring business performance. Given the high mobility and short supply of experienced multi-channel directors, particular consideration should be given to long-term incentive plans designed to retain these key skills.

Retail’s great innovators

Apple’s late founder Steve Jobs topped the list of chief executives who our retailers admire for their ability to foster new ideas. More than two-thirds named Apple as a leader in innovation. In his long career of achievements, Jobs not only helped develop the Macintosh computer, the iPod, the iPhone and the iPad, but also reinvented the role of the store as a physical representation of a brand.

But, Walter Isaacson writes in his biography, “Jobs considered Apple his greatest creation, a place where imagination was nurtured, applied, and executed in ways so creative that it became the most valuable company on earth.”

UK retail leaders admired for their innovation skills included:

n Sir Terry Leahy, former Tesco Chief Executive

n Charles Dunstone, Founder of Carphone Warehouse

n George Davies, Creator of George, Next and Per Una

n Stefano Pessina, Executive Chairman of

Alliance Boots

n Allan Leighton, former Asda Chief Executive

Several retail chief executives also named the following companies for their strengths in innovation:

Apple maintains individual connections to customers while growing quickly.

Marks & Spencer continually brings fresh ideas to market in food.

Tesco maintains a relentless focus on the customer.

Next successfully and gradually expands into new categories.

Lakeland creates the perception that customers are the innovators.

Ikea changes the way consumers outfit their houses.

Inditex brings new products to market fast and frequently.

Amazon commands the online retail market globally.

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Conclusion

Britain’s economy may have slowed, but the pace of change has not. Retailers are adapting to dramatic changes in the marketplace, even as budgets are tightening. A vital investment is the talent they need to innovate for the future.

Korn/Ferry recommends the following practical steps for retail leaders to create an environment infused with innovation.

Find your innovators. Ruthlessly assess the company’s current available skills, knowledge and experience—then invest to fill gaps. Recruit and develop employees and leaders who are capable of generating new ideas at every level of the business. Leverage the technical strengths and knowledge of Generation Y talent.

Add resources. Consider funding an innovation centre, ‘lab,’ or team that operates separately from the core business to stimulate and implement new business ideas. Encourage cross-functional “innovation hubs” throughout the business. Reward teamwork, and defuse ‘groupthink’ by ensuring that teams are diverse.

Embed an innovation ethos. Empower all staff to generate ideas—and ensure that new ideas are captured at all levels of the business. Provide ‘space’ for innovative thinking and methods of getting good ideas from concept to implementation.

Put innovation on the board agenda. Engage with non-executive directors who have innovation/multi-channel experience to broaden perspectives and networks. Consider an advisory board specifically to support digital and multi-channel innovation.

Talk it up. Put innovation at the heart of your vision for the company. Showcase new ideas. Celebrate honourable failures along with the wins. Convince the risk-averse about the power of innovation. Explain what’s in it for the business and what’s in it for the individual.

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Angela AhrendtsChief Executive Burberry

Marc BollandChief Executive Marks & Spencer

John BrowettChief Executive Dixons Retail

Chris BullChief Executive McBride

Ian CheshireGroup Chief Executive Kingfisher

Andy ClarkeChief Executive & President Asda

Geoff CooperGroup Chief Executive Travis Perkins

Matt DaviesChief Executive Pets At Home

Richard EvansPresident, UK and Ireland PepsiCo

Simon FoxChief Executive HMV

Sophie GaspermentExecutive Chairman The Body Shop International

Alex GourlayChief Executive, Health & Beauty Alliance Boots

Steve LewisChief Executive Majestic Wine

Catriona MarshallChief Executive Hobbycraft

Jim McCarthyChief Executive Poundland

Gordon MowatGroup Strategy Director Wm Morrison

Mark Newton-JonesChief Executive Shop Direct Group

Melissa PotterChief Executive Clarks International

Michael SharpChief Executive Debenhams

Mike ShearwoodChief Executive Aurora Fashions

Michael WardManaging Director Harrods

Alan WhiteChief Executive N Brown

AcknowledgmentsKorn/Ferry Whitehead Mann would like to thank the following leaders for their participation in this research:

References

Barsh, Joanna, Marla M. Capozzi, and Jonathan Davidson. 2008. “Leadership and innovation.” McKinsey Quarterly, January.

Lombardo, Michael and Robert W. Echinger. The Leadership Machine: Architecture to Develop Leaders for Any Future, 10th Anniversary Edition. Minneapolis: Lominger International, a Korn/Ferry Company, 2011.

Rigby, Darrell. 2011. “The Future of Shopping.” Harvard Business Review, December.

“What’s in Store?: The forecast for global retail.” White paper, The Korn/Ferry Institute, 2010. http://www.kornferryinstitute.com/files/pdf1/Whats_In_Store.pdf

Isaacson, Walter. Steve Jobs. New York: Simon & Schuster, 2011.

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Sally Elliott is a Senior Client Partner and leads Korn/Ferry Whitehead Mann’s retail practice from the London office, focusing on chair, non-executive director, chief executive and executive board recruitment activity within the UK and international retail sectors. She joined the firm in 2000 from PepsiCo. sally.elliott@kornferrywhm.com

Ben Twynam is a Principal in the retail practice, based in London, focusing on board-level appointments within the UK and international retail and consumer sectors. He has worked in senior level recruitment for the last six years, four of which have been with Korn/Ferry Whitehead Mann in London and Hong Kong. ben.twynam@kornferrywhm.com

Sian Connell is the Director of Networks and Offerings within Korn/Ferry’s Leadership & Talent Consulting practice, based in Minneapolis. She works with retail clients to create sustainable talent practices in support of organisational strategy and innovation. Previously, she worked within a global retail organisation for seven years. sian.connell@kornferry.com

About The Korn/Ferry InstituteThe Korn/Ferry Institute generates forward-thinking research and viewpoints that illuminate how talent advances business strategy. Since its founding in 2008, the institute has published scores of articles, studies, and books that explore global best practices in organisational leadership and human capital development.

About Korn/Ferry Whitehead MannKorn/Ferry Whitehead Mann is the UK business of Korn/Ferry International, the number one global executive search firm and a leading provider of talent management services. Headquartered in Los Angeles, the firm helps clients attract, engage, develop and retain their talent.

Visit www.kornferry.com for more information on the Korn/Ferry International family of companies, and www.kornferryinstitute.com for thought leadership, intellectual property and research.

© 2012 The Korn/Ferry Institute