Recent days has seen Amazon’s much anticipated launch into the Australian retail market, amidst the cacophony of warnings from experts, no less noteworthy than Andrew Bassat, founder and CEO of the World’s biggest job board, Seek.com. The founders of Seek are no strangers to digital disruption, having transformed the traditional print classified job market when launching their on-line job board, in 1998, now boasting 150 million candidates Worldwide and a market capitalisation of AUD$6.8B.
Among Bassat’s dire prognostications is that ‘’disruption of Australian businesses are only 10 percent done’’ and that the banking sector will be the next prey in sights of digital behemoths, Facebook and Amazon (Australian Financial Review, 30th November http://snip.ly/1zziv ), the latter now offering credit to merchants through its platform. Material to Bassat’s assessments is that such developments have been known for some years, yet there is little evidence to suggest that corporates have adequately prepared. It appears that nature, while providing humans with agility to avoid arrows, has done very little to help us ward off the ravages of digital disruption.
However, amidst such gloomy predictions, are there glimmers of hope in the digital quagmire? Ironically, the battle between Amazon and its biggest retail rival, Walmart, can itself provide key insights. One way to extract such learning comes from comparisons of value that the stock market provides: an objective way of comparing companies, on their relative ability to create value, thereby attracting market capital, the lifeblood of funding growth. Often compared to a predatory jungle, the capital market remains the best judge of the corporate resourcefulness and agility sought through ruthless investor selectivity. The criteria or metrics that guide such selection provides an objective means by which to gauge relative performance.
For instance, based on the trailing 12 months to September 2017, it seems that Walmart fares better than Amazon on key investment metrics (Thompson Reuters data reported by Yahoo Finance, Investopedia). Its Return on Assets (ROA) is 7.1% compared to 2.8%; Return on Equity (ROE) is 17% versus 9.7% and its net profit margin is 2.6% while Amazon is half that at 1.3%, a huge differential in low margin retail. Which would you invest in?
Walmart’s response to disruptive threat, saw a slowdown of its new store growth and focused investment in e-commerce and Omni-channel. The result is a 50% increase in on-line sales, year-on-year, compared to Amazon’s growth of 22% for the same period. Walmart’s physical store footprint, which reaches 90% of US households within a 10-mile radius, represents a competitive advantage over Amazon. I.e. Customers can potentially `click and collect’ faster than Amazon can deliver. They can also return goods instore within 30 seconds, something the Amazon system is operationally challenged by.
A key strategy was reconfiguration of the physical store offer to a value-added experience around convenience, a key proposition shared by both brands. Operational efficiency through automation was an essential driver, decreasing headcount and redeploying labour to higher value creation (e.g. curb side pick-up of on on-line orders: ‘click & collect’).
Walmart’s focus on value creation to woo customers has not been limited to its own eco-system. They have shown an appetite for alliances, such as a future focused tech partnership with Google for a voice activated ordering system, a move to match Amazon’s Alexa. Another key partnership has been an unlikely alliance with China’s on-line giant, JD.com, giving Walmart products massive market penetration and a reciprocal physical presence for JD.com, through Walmart stores. Over 30% of Walmart’s international sales now come from China and the arrangement provides a significant entry barrier to Amazon.
Obviously, not all retailers have the enormous capital and knowledge base resources at the disposal of Walmart. However, the thinking behind the development of their digital disruption strategy provides key insights and principles upon which to inform all retailers; perhaps, other businesses, too. And, it’s precisely a new way of perceiving and thinking about the digital environment that is needed. This approach is a really a product of the inherent, ubiquitous nature of digital innovation itself, its scalability and prodigious impact potential. The focus is now on continual planning, as a key management process, as opposed to inflexible plans and long execution lead times.
New Strategic Planning approach
Strategy is now so much more about an enterprise’s agility across swiftly changing industry value chains, and fit of value proposition within this complex and dynamic operating environment. This is also about new conceptual thinking approaches and bold leadership that bring perspectives that define the transformational imperative. In the case of Walmart, this change of cultural mind-set was first championed by former CEO, Mike Duke, transforming an enterprise based strongly on supply chain and operational excellence to one that is fast becoming “entrepreneurial, experimental and flexible’’- a superb new mantra that should drive changes to the strategic planning, quite easily applied across all sectors as the magnitude and speed of disruption becomes more evident.
There are essentially three elements of this planning approach:
1. How a company perceives, interprets and constantly monitors its environment (no longer limited to an annual process, it’s now an ongoing one)
2. The ability to respond and execute a digital strategy (*note here the inclusion and emphasis on `digital’ now wedded closely to any discussion on strategy with almost universal applicability across all sectors)
3. Value proposition (continually renewable in response to impacts on value creation from operating environments and enterprise capabilities: points 1 & 2 above)
The rest of this article concerns itself with the first element, while future articles will tackle the other two components of the new planning paradigm.
Convergence- a key theme across industries
The intrinsic, disruptive qualities of digital lead us to a thinking approach less traditionally linear and more integrative and responsive that encompasses convergence of industries. Does anyone you know still buy CDs or iPods, after Apple converged music with mobile phones and iPads? This convergence not only disrupted the music industry value chain, it also greatly impacted the PC market. In more recent times, Seek.com itself launched an e-learning offer, as did China’s e-commerce giant, Alibaba. The development of the former can be viewed as a natural evolution of an enterprise concerned with career and professional development. The latter, however, is a retail e-commerce and technology company. The approach in common: how an enterprise now values its data and how insights from it are leveraged (i.e. monetised), the new lingua franca.
Data is king
Not many would have imagined the high scalability and growth of global companies who just a few years ago were start-ups. As I type these very words an email from Spotify tells me that during the year I listened to 3367 minutes of their streamed music; most of that time in the past would have been devoted entirely to an increasing pile of CDs-now made completely obsolete! Data is now fast becoming the enterprise asset of greatest value. Launched in 2008, a recent pre-IPO valuation of Spotify was quoted at $13b, making it the biggest music streaming company in the World, with 140 million users [Reuters 28th September 2017].
Impact on industry value chains
Discovering the origins of potential disruption is not easy in this complex, shifting environment, especially for those organisations who are not, culturally speaking, reflective, outwardly oriented and are more reactive or operationally focused. Their potential disrupters not only have scalable technology at their disposal, that can mitigate economic strength of an incumbent enterprise or industry, they also offer alternatives in business models and service offers. Amazon is a prime example, focusing on revenue (over margin), data capture and automation to significantly reduce the traditional industry cost base. In attracting vendors to their `market place’, Amazon also actively disrupt traditional retail distribution channels. This disintermediation is now a trend we are seeing across sectors.
The impacts on value chains come from those companies who either create value or reduce fundamental industry resource costs. Amazon has done both, providing added-value in terms of wider product offerings, services, logistics and delivery, while reducing resource costs. Other impacts involve provision of alternatives (e.g. streaming content Vs. hard copy) or complementary products and services. Key questions to occupy management are how threats will impact value chains and where should boards focus future investments?
Inherent in answers to these questions, will be the relative agility (to nearest rival) of a company along its value chain and the adroitness of thinking to accurately interpret the operating environment, to identify impacts in value chains. Cognitive diversity in management is now indispensable: divergent views that converge in the creation of value. Industries with institutionalised thinking will need help with such new ways of thinking and acting. After all, this Fourth Industrial Revolution is like none before, one which foretells a fusion of physical, digital and biological worlds. It calls for unprecedented human adaptability (both cognitive and skills), and organisational evolution in addressing the opportunities and challenges that lie ahead.
In the case of Amazon, the e-commerce giant is now ostensibly a technology company (40% of its market valuation is attributed to its cloud based services-AWS), moving into acquisition of a bricks and mortar footprint. From the opposite direction in the value chain, Walmart is intrinsically a traditional bricks and mortar retailer moving to integrate digital technology and a reconfigured, value-added store experience. Where they both go to from here will depend on where they find and invest in sustainable added value, competitive advantage. Key to this will be an increasing focus on data capture/analysis and along with this, a keener interpretation of their customers’ needs.
The latter imperative has not and will not change in the future. This, ultimately, is good news for retailers and all businesses; especially, those who have yet to succeed in putting their customer value proposition at the centre of their key enterprise processes and at the heart of their constant attention.