Reinventing Retail

Jim Euchner, Research-Technology Management Vol. 63, Issue 3, From the Editor

One day, Amazon will fail.

—Jeff Bezos

 

I was watching You’ve Got Mail the other day, that not-so-old movie that had as its backdrop the creative destruction of the corner bookstore. The category-killer chain at the center of that movie’s plot had introduced a new business model that was simply much better than that of the mom-and-pop bookstore. One after one the independent bookstores were being driven out of business.

The waves of disruption, especially in retail, are coming fast. Back in 1998 when the movie was released, Borders and Barnes & Noble—the category killers the movie was talking about—were themselves being disrupted by Amazon. At that time Amazon had $610 million in revenues but was growing at 42 percent a quarter. Both Borders and Barnes & Noble had revenues in excess of $2 billion that year. In 2011, a little more than a decade after the movie’s release, Borders was bankrupt. Barnes & Noble is still operating but at greatly reduced scale.

The book industry is not alone. Blockbuster Video disrupted local movie rental providers and then was itself disrupted by Netflix’s original DVD-by-mail business; Netflix subsequently disrupted itself with its streaming services, and then anticipated the restructuring of the entertainment industry by developing its own proprietary content. It is hard to remember that Netflix’s first big innovation was a specially designed envelope.

Disruption in retail, of course, is not over. Amazon is working on fully automatic stores. In one of its pilots, you register your card upon entry, pick up what you want from the shelves, and walk out when you’re finished shopping. The IT takes care of the checkout and billing (a major customer pain point). A few Harvard professors tried, unsuccessfully, to trick the system (Iansiti and Lakhani 2020).

A whimsical YouTube video titled “Amazon Yesterday Shipping” promotes delivery before you order something that Amazon (somehow) knows that you want. Time warps are not in our near-term future, but Amazon is using AI to predict what people within a local distribution center will buy so that an increasing number of orders can be delivered that same day.

By completely rethinking the retail model, StitchFix is effectively delivering on the promise of delivery before you know you want something. You subscribe to StitchFix’s clothing service, and each month the company sends you clothing that you might have bought if you had had the time (and fashion sense) to shop for it yourself. StitchFix uses AI and fashion expertise, along with a profile you create, to select the items to send you each month. The StitchFix business model only works if the clothing returns are sufficiently low to make economic sense, and that’s where AI plays a role. This business model—which turns the entire shopping experience on its head—is disruption on steroids.

Brick and mortar retail still represent about 90 percent of all sales, yet each month brings new bankruptcies or stories of massive store closures. In every town I drive through, I see “Space for Lease” occasioned by retailers driven out of business by online retailers. Traditional retailers have to figure out how to compete. Several articles in this issue of RTM may help point the way.

In “Designing an Omni-Experience to Save Retailing: Lessons from an Italian Book Retailer,” Federico Artusi, Emilio Bellini, Claudio Dell’Era, and Roberto Verganti describe “Read, Eat, Dream” (RED), a new concept the Italian bookseller LaFeltrinelli has introduced to change the experience of its physical presence in the marketplace. Their model shifts the store from a fulfillment center to one of engagement—one that brings customers pleasure (read, eat, and dream). This concept is one response to disruption from e-commerce competitors. The authors present a framework comprising four key design elements that they believe are central to creating an omni-experience.

Jose Albors Garrigós and Maria de Miguel Molina take a different approach in “Integrating Customers and Suppliers in Retail Co-innovation.” They address the challenge of product innovation for retailers—those that sell but do not design or manufacture goods. Mercadona, a major Spanish retailer, sought to overcome this structural impediment by introducing a co-innovation model that engages both customers and suppliers to develop new products that customers really want. The authors describe the approach and the challenges of capturing value for retailers doing product innovation.

This issue’s “Conversations” article features Youngjin Yoo, a distinguished professor and founding faculty director of Case Western Reserve University’s xLab. Yoo discusses his Digital First framework. A key element of this framework is to start with the ideal customer experience rather than with technology. Yoo suggests looking through the lens of the customer to identify opportunities for delighting customers through personalized “computed experiences.” Too often companies seek to make their products and services digital by adding sensors and intelligent algorithms without considering how those same technologies might transform their offerings. Companies that approach digital products from a Digital First perspective have the opportunity to redefine their business category. Yoo’s work is as relevant for service industries like retail as it is for manufacturers.

We are better able to understand this disruption, and to manage it, because of the work of Clay Christensen, who died in January of this year. In memoriam, this issue reprints “Managing Disruption: An Interview with Clayton Christensen,” first published in January 2011. In the interview, Christensen explains his theory in practice, using examples from companies that capitalized on disruption (Intel, Intuit) and those that suffered from it (Kodak, Xerox). A key point Christensen makes is the importance of getting everyone thinking clearly about disruption, all the way up to the board of directors. The nuances of his thinking are often missed in the retelling, and this is unfortunate. Too often people focus only on low-cost disruption, while a lot of recent disruption competes based on entirely new “dimensions of merit”; it is these new attributes that explain the willingness of customers to compromise on traditional metrics and adopt the offerings of an upstart. Christensen’s work is both practical and vitally important in today’s world, and we hope that this interview is helpful.

All of the disruptions we have considered in retail start with the customer. In one way or another, they enable greater product selection, faster delivery, greater personalization, or lower cost. Convenience has been redefined upward, and personalization is shockingly better than it was just a few years ago. Stay tuned as more digital innovators in retail cross over into physical space, while brick and mortar competitors seek to incorporate features pioneered by digital natives into their physical space and find new bases for competition.

One thought on “Reinventing Retail

  1. William Miller May 4, 2020 / 4:16 PM

    Christensen had a limited theory of disruption that described the threat coming from the low cost end of the market. He thought that Apple’s iPhone would fail because it targeted the high end of the market. A complete theory of radical innovation which contains disruption is based on the theory of dominant design published by Jim Utterback and extended in the theory of Fourth Generation Innovation to include 3 parts – capabilities, business model and industry structure. This extended theory describes what happened to Kodak in which the digital camera was replaced by smart phones, the business model by a collection of companies – Apple, Facebook and the industry structure was changed by the Internet.

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