Greg would like to thank Jeanne G. Harris and Eric M. Lowitt for their contributions to this months column.
Retailers are facing an increasingly hostile competitive landscape, with analysts predicting tough times ahead. In the more mature Western markets, subdued consumer spending combined with increased competition will make sales growth increasingly difficult to achieve. The Internet has made geographical advantage less of an issue, and proprietary technologies are not proprietary for long. Elsewhere, breakthrough innovations in products or services are increasingly difficult to sustain. Despite these challenges, companies face continual pressure to reduce costs and provide consumers with more for less - at a time when U.S. shopping malls are, according to media reports, feeling the economic pinch.1
The basis for competition is now flawless, efficient execution and decision-making that outsmarts rivals. And the key to both can be found in the sophisticated use of analytics - the extensive use of data, statistical and quantitative analysis, explanatory and predictive models, and fact-based management to drive decisions and actions.
As part of my research into high-performance businesses, Ive found that a growing number of forward-thinking retailers have already recognized the power of analytics and are building their competitive strategies around data-driven insights. By using analytics to make better decisions and to extract maximum value from their business processes, retailers such as Tesco, Best Buy, Wal-Mart and Amazon are able to identify their most profitable customers, accelerate product innovation, optimize supply chains and pricing, and identify the true drivers of financial performance.
Each of these companies may seem unique, but what truly distinguishes these leaders is not their business processes per se, but the analytical skills and capabilities that allow them to achieve lasting competitive differentiation. Their competitive advantage is their analytical capability.
Analytical competitors can be found in many different industries besides retail, however. Some, like Netflix and the global cement manufacturer CEMEX, are not widely recognized as analytical competitors; others - Harrahs Entertainment and Capital One, for example - have been lionized by the media for their exploits. These companies have two things in common: they compete on the basis of their analytical capabilities, and they are highly successful.
Research from The Accenture Institute for High Performance Business found a powerful link between organizations with pronounced analytical orientations and market out-performance. High performers are much more likely to value fact-based decision-making and to have the skills and capabilities in place to effectively use analytics across their organizations.
Retailers have used statistical data analysis for years, but in most cases, analytics was simply a means to an end rather than a systematic approach to achieving a competitive advantage. As a result, while many companies can point to the realization of analytical benefits, most have obtained only a fraction of the potential benefits and little in the way of competitive differentiation. However, as retailers become more sophisticated in their use of analytics, they are shifting tactics. Instead of focusing on traditional metrics (such as sales per square foot, per department and so on) and routine customer segmentation, they are taking a much more integrated approach to merchandising. A few leaders have recognized that a burgeoning analytical capability is underpinning their customer-centric strategy.
What separates retailers that merely use data and analysis from true analytical competitors - those that can nimbly outmaneuver rivals at every turn? Analytical competitors achieve large-scale results by:
- Focusing analytics on leveraging their distinctive capability - the sum of the integrated business processes and capabilities that allow a company to serve customers in differentiated ways and that create an organizations formula for business success.
- Having senior leadership committed to analytical competition and to building their organizations analytical capability.
- Strategically managing and applying analytics across the entire enterprise.
While the retail industry as a whole is making progress toward the creation of robust analytical capabilities in the service of strategic capabilities, relatively few retailers are truly analytical competitors. Those that are furthest along have already seen significant benefits across their organizations. Examples include:
- Tescos use of customer analytics. While the direct marketing industrys average response is only two percent, Tescos coupon redemption rate is 20 percent and ranges as high as 50 percent.2
- Best Buy analysis led to the creation of eight customer segments. The company has designated a few stores to use as laboratories to develop deeper intimacy with these segments. These new stores are generating sales at twice the rate of Best Buys traditional format.3
- Wal-Marts legendary data warehouse collects massive amounts of sales and inventory data (583TB as of April 2006) into a single integrated technology platform. This data is treated as a proprietary asset and is routinely mined by both Wal-Mart and its suppliers. For example, suppliers run 21 million queries on the data warehouse every year, covering such data as daily sales, shipments, purchase orders, invoices, claims, returns, forecasts, radio frequency ID deployments and more.4
- Amazon applies advanced optimization and supply chain management statistical techniques across their fulfillment, capacity expansion, inventory management, procurement and logistics functions to manage a constant flow of new products, suppliers, customers and promotions, and to deliver orders directly to customers by promised dates.
While its still early in the game, these and other leading retailers are rapidly benefiting from their moves up the analytics experience curve. Those that are lower on the curve should prepare themselves to leverage this emergent source of competitive differentiation as they pursue high performance.
To learn more about the impact of analytics on retailing, see Competing on Analytics: The New Science of Winning by Thomas H. Davenport and Jeanne G. Harris, Harvard Business School Press, 2007.
- U.S. malls start to feel consumer slowdown. International Herald Tribune, March 12, 2008.
- Linda Dillman, quoted by Dan Briody in Wal-Mart: By the Numbers, BizBytes, April 2006.
- Clive Humby and Terry Hunt with Tim Phillips. Scoring Point: How Tesco is Winning Customer Loyalty. London: Kogan Page Co., 2003.
- Matthew Boyle. Best Buys Giant Gamble. Fortune, April 3, 2006.
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