Future of Retail: Removing the Roadblocks
In the first two articles in the series, Deloitte China Consumer Products and Retail Sector Leader Zhang Tianbing shared his insights on the market characteristics and potential innovation pathways for the future of retail. Meanwhile, what are the pressing challenges faced by disruptors, partners and conventional retailers in the process of transformation and innovation, and what coping mechanism should be adopted? In this article, Zhang delves deeper into the obstacles and coping mechanism in the transition towards the future of retail.
In Redefine Market Share in Time and The Path to Innovation, we have covered the characteristics and potential innovation pathways for the future of retail. The third article in this series will center on the obstacles faced by various enterprises in the transformation and the corresponding coping mechanism, in order to provide a fresh perspective on how to remove these roadblocks.
In China’s unique digital environment, disruptors, partners and conventional retailers are all striving to reshape the retail ecosystem to be more consumer-oriented with the aid of increasingly sophisticated technology and analytics. While conventional retailers are busy transitioning to the new age of consumption, e-commerce businesses are concentrating on strengthening their cooperation with conventional retailers to develop innovative retail models. However, the core obstacle on the road ahead seems to be the very accomplishment these established retailers used to take pride in. Yet what is the reason behind this seeming paradox?
The established players in consumer products and retail are usually built on the bedrock of organization, people and infrastructure compatible with the market environment of their glorious past. However, this very cornerstone that has made the company is now hindering its transformation into the future of retail. In the past couple of years, major leadership reshuffling has been seen in a number of renowned MNCs in the consumer products and retail sector, with the entire industry feeling the aftershock. The past achievement has become the roadblock for these experienced market players, preventing them from seizing the golden opportunity to embrace the future of retail and severely hindering their performance.
In more specific terms, the three key aspects - organization, people and infrastructure - are each posing major challenges in the transformation. The internal structure built by conventional retailers around the past success has been rendered obsolete in the new retail ecosystem which features significantly different market environment and calls for new organization and new people.
Conventional players in retail and consumer products:
The organizational structure built on old business models is no longer compatible with new retail. While the success of these players in the past might have been largely attributed to heavy dependence on wholesale and distribution, the changing market environment in recent years meant that these companies had to expand the existing organizational structure to cope with increasing competition. The direct sales, self-run e-commerce channels and third party e-commerce channels were given a lot of attention lately and have been included into the existing system. However, in this updated system, various channels remained relatively independent and disconnected in their departmental setting, management and resources.
In the future of retail, the center of the entire ecosystem has shifted from businesses to consumers. In order to excel in the market, enterprises need to cater to consumer needs with highly integrated products and experiences. The old organizational structure featuring separate and parallel channels and market segmentations, which is no longer compatible with the consumer-centered omnichannel model favored in the future of retail, has now become a major roadblock on the path of transformation.
Fig 1. Consumer-centered Competitive Strategy
As business and organizational structure determines people and infrastructure, the senior management and infrastructure compatible with conventional business model have to go through a complete overhaul for the company to embrace the new retail model.
- A major obstacle in the conventional organizational structure lies in the fact that different and fragmented business units are held in the hands of a few individuals with vested interest. Conventional enterprises owe its past success to distributors and channels. As a result, heads of corresponding business units have worked their way up to senior management and are reluctant to change the existing organizational structure and resource allocation. Furthermore, the added cost incurred during the transformation and the short-term negative impact on overall business performance also made it difficult for the leadership to take the leap.
- For enterprises in the retail and consumer products sector, their infrastructure consists of the IT system, human resources, finance, etc. Conventional retailers had built their infrastructure in line with their internal operation and organizational structure, yet this existing infrastructure has already been rendered obsolete by the consumer-centered omnichannel model in new retail. For instance, in the past, many multinational retailers reliant on the distributor model had already established supporting IT infrastructure. As new channels developed in recent years, these companies started to annex new modules that are completely independent and fragmented in IT and organizational structure. The lack of integrated overall design and planning in infrastructure has prevented these enterprises from transitioning towards consumer-centered omnichannel service in the future of retail.
As a case in point, Kodak failed to lead the digital revolution after inventing the digital camera and was eventually edged out of the market by fast-growing digital camera brands. Its bankruptcy could be attributed to the “people” obstacle mentioned above. Despite being fully aware of the revolutionary significance of the new products and technology as well as its technological shortcomings, Kodak was unable to mitigate the conflicts between the conventional film camera segment and the new digital camera segment. The senior executives that rose to power with film cameras were in charge of resources and decision-making. Focusing on short-term business development, the leadership refused to jeopardize their vested interest for long-term potentials and opportunities. In today’s fast-changing retail market, this tale of caution is of increasing significance and relevance.
Both e-commerce giants like Alibaba and JD and SNS consumer data-based internet companies like Tencent are busy developing transformation solutions by offering enabling data and tech, as well as resource integration. For example, by providing brand owners and mom-and-pop stores with support in logistics, channels, data and technology, Alibaba’s LST and JD’s Xintonglu (both are newly launched B2B platforms) are striving to connect brands, conventional retailers and mom-and-pop stores to ensure o2o integration and connectivity. Although e-commerce businesses are equipped with the technological competence and resources to aid conventional retail and help brand owners partially transform into omnichannel operation, the major obstacles mentioned above still exist and tend to emerge as the cooperation deepens. The fragmented organizational structure means that a top-down approach is required where the leadership takes the initiative to coordinate all internal and external resources as well as all divisions, set up clear internal evaluation and business segmentations of human resources, and make pertinent investment in infrastructure to facilitate the transformation. For e-commerce businesses that are trying to give conventional retailers an external push, all of these optimization measures are major challenges.
There are a few actions to take in face of these challenges:
Adopt a top-down approach where the leadership takes the initiative to embrace transformation into the future of retail. It is imperative for conventional enterprises to shift from the multi-channel parallel operation model to consumer-centered omnichannel model that covers all life scenarios of consumption. MNCs in China should reinforce horizontal coordination and overhaul business and organizational model.
Fig 2. Omnichannel Management in the Future of Retail
Facilitate organizational integration. An integrated and consumer-centered organizational structure should be built to increase consumer engagement and empower consumers. Meanwhile, integrated design for business model and internal structure should be adopted to facilitate supply chain optimization and omnichannel integration.
Fig 3. Interconnected Supply Chain
Set up comprehensive supporting arrangements for the transformation. Comprehensive transformation should be carried out via organizational restructuring, staff training, performance evaluation optimization and competence development, in order to optimize business flow, resource circulation, and system support to ensure all are in line with the overall transformation plan.