Retail Strategy

Prof. Sandeep Hegde

Objectives

• The importance of strategy in retail

• The strategic planning process

• International expansion as a growth opportunity

• The concept of retail branding

• The retail value chain

Strategy – The Retail Perspective

• Strategos – the art of the general

• A retail strategy is a clear and definite plan that the retailer outlines to tap the market and build a long-term relationship with the customers.

What is a Retail Strategy?

• It is a statement identifying the retailer’s target market, the format the retailer plans to use to satisfy the target market’s needs, and the bases upon which the retailer plans to build sustainable competitive advantage.

Elements in a Retail Strategy

• Retail target market – the market segments toward which the retailer plans to focus its resources and retail mix; a group of customers with similar needs

• Retail format – the retailer’s type of retail mix (nature of merchandise/services offered, pricing policy, advertising and promotion program, approach to store design and visual merchandising, customer service and typical location

Elements in a Retail Strategy contd.

• Sustainable competitive advantage – an advantage over competition that can be maintained over a long time; a key to long-term financial performance

Example of Retail Strategy

• Starbucks – a national chain of gourmet coffee cafés, generates annual sales of over $500M. Friendly knowledgeable counter servers called baristas (Italian for bartenders), educate customers about Starbuck’s products. The company has entered into some creative partnerships to put its cafes in Nordstrom and Barnes and Nobles stores and serve its coffee in United Airlines

Factors influencing how to compete

• Competitive environment: mature, fast changing, competitively intense

• Customer value: what is especially valued by customers? What determines customer satisfaction?

• Business competences: how do the competences of the business relate to what’s valued by customers?

• Stakeholder expectations: do they place any constraints on choice of strategy?

Competitive strategy is

• The basis on which a business (unit) might achieve competitive advantage in it’s market

• Competitive advantage is defined by meeting customer needs more effectively, in ways which competitors find difficult to imitate

• Customer needs are defined by lower price or higher quality/more added value

RESOURCES

CAPABILITIES

CORECOMPETENCIES

CompetitiveAdvantage

CompetitivePosition

Tangible: Financial. Intangible: Reputation

Functional areas: Manufacturing, distribution

Valuable and rare (consumer perspective) Hard to copy and nonsubstitutable(competitor perspective)

Determine

Some become

As source of

DeterminesThe building blocks ofCompetitiveStrength

The VRIO Framework

If a firm has resources that are:

• valuable,

• rare, and

• costly to imitate, and…

• the firm is organized to exploit these resources,

then the firm can expect to enjoy a sustainedcompetitive advantage.

Applying the VRIO Framework

The Question of Value• Does the resource enable the firm

to exploit an external opportunity or neutralizean external threat?

The Question of Rarity

• if a resource is not rare, then perfect competitiondynamics are likely to be observed (i.e., nocompetitive advantage, no above normal profits)

• a resource must be rare enough that perfect competition has not set in

Applying the VRIO Framework

Valuable and Rare

If a firm’s resources are: The firm can expect:

Not Valuable Competitive Disadvantage

Valuable, but Not Rare Competitive Parity

Valuable and RareCompetitive Advantage

(at least temporarily)

Applying the VRIO Framework

The Question of Imitability

• the temporary competitive advantage of valuableand rare resources can be sustained only if competitors face a cost disadvantage in imitatingthe resource

» intangible resources are usually morecostly to imitate than tangible resources(Harley-Davidson’s styles may be easilyimitated, but its reputation cannot)

Applying the VRIO Framework

Value, Rarity, & Imitability

If a firm’s resources are: The firm can expect:

Valuable, Rare, butnot Costly to Imitate

TemporaryCompetitive Advantage

Valuable, Rare, and Costly to Imitate

SustainedCompetitive Advantage

(if Organized appropriately)

Applying the VRIO Framework

The Question of Organization

• a firm’s structure and control mechanismsmust be aligned so as to give people abilityand incentive to exploit the firm’s resources

• examples: formal and informal reporting structures,management controls, compensation policies,relationships, etc.

• these structure and control mechanisms complementother firm resources—taken together, they can help a firm achieve sustained competitive advantage(3M Company)

The VRIO Framework

Valuable? Rare?Costly toImitate?

Exploited byOrganization?

CompetitiveImplications

No

Yes

Yes

Yes

Yes

Yes Yes Yes

No

No

No Disadvantage

Parity

TemporaryAdvantage

SustainedAdvantage

The VRIO Framework

Valuable? Rare?Costly toImitate?

Exploited byOrganization?

CompetitiveImplications

No

Yes

Yes

Yes

Yes

Yes Yes Yes

No

No

No Disadvantage

Parity

TemporaryAdvantage

SustainedAdvantage

EconomicImplications

BelowNormal

Normal

AboveNormal

AboveNormal

Sources of Sustainable Competitive Advantage

• Customer Loyalty – customers are committed to shopping at a store. Customer loyalty can be built through building a brand image with an emotional connection with customers, using databases to develop and utilize a deeper understanding of customers

• Location – must be convenient

Sources of Sustainable Competitive Advantage contd.

• Human Resource Management – committed, knowledgeable employees

• Distribution and Information Systems – shared systems with vendors

• Unique Merchandise – exclusive • Vendor relations – coordination of procurement

efforts; ability to get scarce merchandise• Customer Service – knowledgeable and helpful

salespeople

The Retail Value Chain

• Pentagon Player (most of the retail outlets) Product Place Value People and Communications

• Triangle Player (Dell Computers) Systems Logistics Suppliers

Creating customer value

• “Customer value is the customer’s perceived preference for, and evaluation of, those attributes, attribute experiences and consequences that facilitate or block the achievement of the customer’s goals and purposes” (Woodruff 1997)

Creating customer value through the value chain

“an analysis of the value chain is the appropriate way to examine competitiveadvantage” Michael Porter 1985

Sources of competitive advantage in the value chain

Value chain for food discounter

Strategy Alternatives

Stability Growth Divestment Combination

Intensification Diversification

Market Penetration

New Market Development

New Product Development

Vertically Integrated

ConcentricDiversification

ConglomerateDiversification

BackwardForward

Grand Strategy1. Growth - Can be promoted internally by

investing in expansion or externally by acquiring additional business divisions.

2. Stability - Remain same size or grow steadily and in a controlled fashion.

3. Divestment - Forced decline by either shrinking current business units or selling off or liquidating entire businesses.

Global Strategy

• Globalization: product design and advertising strategies are standardized around the world

• Multidomestic: adapt product and promotion for each country

• Transnational: combine global coordination with flexibility to meet specific needs in various countries.

Growth Strategies for Retailers

• Market Penetration

• Market Expansion

• Market Development

• Diversification

Market Penetration

• Involves directing investments toward existing customers using the present retailing format

• Examples are attracting customers in the retailer’s target market who don’t shop at its outlets, inducing the customers to visit the store more often. Approaches include attracting more customers by opening more stores, keeping existing stores open for longer hours

Market Penetration• Attract customers from target market – Big Bazaar’s

Sabse Sasta Din every Wednesday (being the middle of week footfalls are the lowest)

• Get current customer to visit store more often or buy on each visit

Eg: Pantaloons showrooms offer discount coupons (upto 40%) when customer purchases merchandise above a certain amount. This can be redeemed only on the next visit and purchase within a period of 45 days.

• Cross Selling – sales associates in one department sell complimentary merchandise from other departmentsEg: Manicurist sells services plus hand lotion or nail polish

Market Expansion

• Market expansion growth opportunity involves using the existing retail format in new market segments.

• Eg: Crosswords bookstores in Shopper’s Stop.

• Chain Store retailer Bombay Store opens its chain of stores in major cities airports

Retail Format Development

• Involves offering customers a new retail format – a format involving a different retail mix to the same target market

• Example is Barnes and Noble, a specialty bookstore retailer, sold books to its present customers online.

• Spencer’s Hypermart opening up a new chain of convenience stores called as Spencer’s Daily. This competes with the local Kirana stores in residential areas.

Retail Format Development• Develops a new retail format with a different

retail mix for the same target market• Multi-channel retailing• UK based TESCO:

– Tesco Express: small stores located close to where customers live and work

– Tesco Metro: bring convenience to city center location by specializing in ready-to-eat meals

– Tesco Superstores: traditional stores– Tesco Extra: one-stop destination with the widest

range of food and non-food products

Diversification

• Involves a new retail format directed toward a market segment that is not presently served

• Diversification opportunities are either related or unrelated. Vertical integration is another diversification opportunity. This can either be backward (retailers can be manufacturers) or forward (manufacturers turns into retailers) integration.

Keys to Success in Global Retailing

• Globally sustainable competitive advantage– Low cost (Walmart)– Fashion reputation (The Gap, Zara)– Category dominance (Best Buy, Office Depot)– Brand Image – Disney, Ikea, Starbucks

Keys to Success in Global Retailing contd.

• Adaptability – recognizing cultural differences and adapting to needs of local market

• Global Culture – “think global”

• Financial Resources

International Market Entry Strategies

• Direct Investment – occurs when a retail firm invests in and owns a division or subsidiary that operates in a foreign country

• Joint Venture – is formed when the retailer pools its resources with a local retailer to form a new company in which ownership, control, and profits are shared

International Market Entry Strategies contd.

• Strategic Alliance – a collaborative relationship between independent firms

• Franchising - is a contractual agreement between a franchisor and a franchisee that allows the franchi

see to operate a retail outlet using name and form at developed and supported by the franchisor.

In a franchise contract, the franchisee pays a lump

sum plus a royalty on all sales for the right to oper ate a store in a specific location and operate the o

utlet in accordance with procedures prescribe by t he franchisor beginning with assistance in locating

and building , developing products and service sol d , training , advertising and system development

that run by franchisor with costs shared by franchisees.

Franchise Store Franchise Store

• Franchise Store : Entrance Criteria Franchise Store : Entrance Criteria– Initial Fee or Franchise Fee : Initial Fee or Franchise Fee :– Royalty Fee Royalty Fee ::– operate the outlet in accordance with procedures operate the outlet in accordance with procedures

prescribe by the franchisor prescribe by the franchisor

• Advantage of Franchise Store Advantage of Franchise Store– Utility and Value of Master Brand or Franchisor Utility and Value of Master Brand or Franchisor– All supported by Master Company or Franchisor All supported by Master Company or Franchisor– Monetary and Source of fund supported Monetary and Source of fund supported

– Training and development human resource efficiency Training and development human resource efficiency

Franchise Store Franchise Store

• Franchise Store : Value , Brand an Franchise Store : Value , Brand an d Imaging d Imaging

– Intangible Asset ; Low of sunk cost Intangible Asset ; Low of sunk cost– Value and Creditability in Quality of Product an Value and Creditability in Quality of Product an

d Service d Service– Get iGet i nformation through consumer nformation through consumerss all all the the timetime

• Franchise Store : Consideration Franchise Store : Consideration– consider the franchisee consider the franchisee veryvery careful carefullyly– Control the quality of product and service strictl Control the quality of product and service strictl

yy– Be careful about franchisee’s liquidity and capit Be careful about franchisee’s liquidity and capit

al asset to hold the firm in long term. al asset to hold the firm in long term.

The Strategic Retail Planning Process

1. Define the business mission

2. Conduct a situation audit (market, competitive, environmental, and internal factors)

3. Identify strategic opportunities

4. Evaluate strategic alternatives

5. Establish specific objectives and allocate resources

6. Develop a retail mix to implement strategy

7. Evaluate performance and make adjustments

Steps involved in strategy development

• Establish Mission

• Analyze situation

• Identify options

• Set objectives

• Obtain and allocate resources

• Develop & Implement Plan

• Monitor Progress and Control

The Mission or the Purpose of the Organisation 

A mission statement is a statement of the long term purpose of the organization.

Mission statements need to provide a clear sense of direction for the organization and often reflect the values of the organization or the corporate culture.

“Our Corporate Vision”

“Sears, Roebuck & Co., a family of diversified businesses, is the leader in providing and distributing quality products to consumers. We will engage in those commercial opportunities that leverage the distinctive capabilities of our existing businesses.

We are committed to our most valued asset, our reputation for integrity.

We dedicate ourselves to the principle that serving the customer is of prime importance. We strive to provide our shareholders with a foundation for consistent and profitable investment growth.”

Diversification @ Sears• Sears began to diversify in the 1930s, adding

Allstate Insurance Company in 1931 and placing Allstate representatives in its stores in 1934.

• Over the decades it established major national brands, such as Kenmore, Craftsman, Diehard, Silverstone, and Tough skins.

• The company became a conglomerate during the mid-20th century, adding Dean Witter and Coldwell Banker real estate in 1981, starting Prodigy as a joint venture with IBM in 1984, and introducing the Discover credit card in 1985.

• In March 2009, Sears purchased the social search engine, Delver.

Divestiture @ Sears• In the 1990s the company began divesting itself of many non-retail

entities, which were creating a burden on the company's bottom line.

• In 1993, Sears stopped production of its general merchandise catalog because of sinking sales and profits. However, Sears Holdings does continue to produce specialty catalogs and reintroduced a smaller version of the Holiday Wish Book in 2007.

• In 2003, Sears sold its retail credit card operation to Citibank. The remaining card operations were sold to JPMorgan Chase & Co. in August 2005.

• In 2003, Sears opened a new concept store branded Sears Grand. Sears Grand stores carry everything that a regular Sears carries, plus health and beauty, toys, baby care, cleaning supplies, home decor, pet food, cards and party supplies, books, magazines, electronics, music, movies, and an edited assortment of groceries. Sears Grand stores are about 175,000 to 225,000 square feet (16,300 to 19,500 m²). The first Sears Grand store (and still the largest at 225,000 square ft) opened at Jordan Landing in West Jordan, Utah in 2003.

The Situation Analysis

• PEST analysis, SWOT analysis, BCG Matrix, Porter’s Five Forces

• Helps the retailer determine his position, strengths and weaknesses, the opportunities which can be tapped and the weaknesses to be worked upon.

• It is the core element of any strategy

Identify OptionsIndependent retailerChain retailerFranchise

•Market Penetration

•Market Development

•Retail Format Development

•Diversification

Set Objectives

•Sales Volume

•Market Share

•Retail Expansion

•Profitability

•Liquidity

•Returns on Investment

•Good objectives are measurable, are specific to time and indicate the priorities of the organization

Obtain & Allocate Resources

• Human Resources

• Financial Resources

Develop the Strategic Plan

• Target Market

• Determine the Retail Mix

• Positioning Strategy

Implement Strategy, Evaluate and Control

• The key to success of any strategy lies in its implementation.

• The focus must be single minded

• Periodic Evaluation

Retail Branding• A retail brand is an extension of branding that is

associated with the product range• The retail brand encompasses the product and

the processes associated with a company that a consumer chooses to shop.

• Many retailers have extended their core product ranges under the umbrella of the retail brand to increase the variety of product categories on offer

• Shop-in-shop vs. Exclusive Showrooms• MBO vs. EBO