|Chapter 2 - Global Village to Global Market|
Retailing has become transformed by the globalisation of competition and the need to deliver continual growth in output through a stimulated consumer market. Significant demographic changes and recessionary pressures have also affected the demand side of the equation. Retail operations and retail management have both changed radically over the last decade or two. The retailer stands at the meeting point of two chains - one leading from producer to outlet, and one from outlet to consume - and IT offers unparalleled opportunities for retailers to control both the supply chain and the demand chain.
So far, information technology has had a limited but significant impact on the retail landscape worldwide. Retailing remains predominantly a labour-intensive and parochial activity, with a minority of large and, increasingly, global companies with market power. But technological advances themselves will make IT an increasingly important factor in retail developments, particularly in the continued growth of global players and in the stimulation of competition. Local conditions, regulations and cultural attitudes still present formidable barriers to global expansion which IT can address, while the simultaneous domestic application of new technologies is pushing the growth of new types of retailing, and IT itself will transform the organizational structures of conventional retailers. Store-based retailing is unlikely to survive without radical transformation - and some commentators have estimated that a half of all stores will close in the process.
The Information Revolution
It has frequently been observed that the world is undergoing a socio-economic revolution as deep and far-reaching as the industrial and agricultural upheavals that preceded it. Commentators and analysts identify it as an information revolution, by which they seem to mean that the traffic in information and its exploitation in the processes of wealth-creation and distribution is becoming as vital to economic life as the traffic in, and exploitation of, land, labour and capital were in the past. Information, in college-book terms, has become a factor of production.
As with all revolutions, it is difficult to pinpoint exactly when this one started. Any choice of a precise moment for the transition between epochs is bound to be questionable. It can only serve as a kind of instructive metaphor. Since the invention of the telegraph, information has been traded and exploited for financial gain and political power. But before the telegraph there was Jacob Reuter s pigeon post, the horse messengers of the Middle Ages, and the runners of antiquity. The printing press, telephone and radio all have serious claims to be the progenitors of any information revolution, but most people - if asked - would probably consider the computer to be the real Lenin of these tumultuous times. However, in most important ways all the inventions that have shaped modern communications - even the computer - are really triumphs of engineering; and, as such, they belong firmly to an industrial age. A jumped up calculating machine - which is how the computer started life - could have little significant impact on the social or economic order. But technology creates possibilities and the real fountainhead of change is not technology itself, rather it is this realm of possibilities - the ways in which the computer, the telephone, or the radio can be used.
In fact, the information revolution is less the product of a single invention than the result of the convergence of technologies made possible by a new model of invention. The computer is central to that new model because of its Pythagorean emphasis on the universality of number. The years following World War II witnessed technological changes that gave the computer its capabilities as an engine of transformation - miniaturisation, solid state physics, materials science, electronics. The transistor and the integrated circuit were, in turn, products of the most successful scientific theory of modern times, quantum electrodynamics. But none of these would have mattered if not for their ability to give a form to mould-breaking ideas about the applications of technology. From our point-of-view, therefore, the information revolution began with the introduction in 1959 of the small-scale minicomputer by the US company, Digital Equipment Corporation.
The minicomputer began to make air-conditioned computer rooms redundant and took data processing technology into laboratories and offices. It was soon followed by the microprocessor which used mass-production techniques and turned the computer into a commodity to be found anywhere - in shops, factories, vehicles and homes. The sheer weight of computing power that now exists has caused a ualititative shift in the use of computers. They now capture data, analyse it, visualise it, convert it into different forms, and communicate it. They control machines from electric kettles to aeroplanes. They speak and recognise human speech, write and recognise human writing. Connected together, they become information systems rather than mere calculators, moving the focus of economic activities from materials and production to knowledge and procedures. This change is having a profound effect on retailing, transforming its priorities from the distribution of goods and the satisfaction of demand to the management of processes and relationships.
An Overview of Retailing
Retailing took on a new importance in the late twentieth century, foreshadowed by the arrival of the supermarket in the thirties and forties and reinforced by the proliferation of boutiques (a new word in English) and mail-order outlets during the sixties and seventies, selling fashion and life-style items. If at first retailing had been largely concerned with the distribution of necessities, by the late twentieth century in the industrialised world it had become preoccupied with the satisfaction of urges for novelty and convenience, and - through the sale of luxury and value-added items - it created an appearance of choice which seemed to address consumption as a creative process. In survey after survey, shopping now emerges as one of the favourite recreations of much of the industrialised world. The decline of city centres created new opportunities for retail outlets to congregate in malls, shopping centres, and revamped markets like Les Halles or Covent Garden.
Retailing itself grew unevenly and it would be misleading to believe that its primary function in the distribution of goods and services has disappeared. Change in this area is slow and gradual and the similarities between contemporary retailing and its antecedents are more striking than the differences. For the most part, retailing has always been labour intensive, technologically backward and small-scale. European Commission figures indicate that between 70% and 80% of all staff in retail are women, and that wage levels are generally below national averages (the two often go hand-in-hand). The most advanced retail operations (in practice, this means the largest) are in the US, the UK, Germany and France. The UK has a disproportionate number of large-scale retail operations, although even here - as in most of the rest of the world - the majority of shops are independently operated. The British, it seems, are halfway between a nation of shopkeepers and a nation of shoppers.
Over the last decade or so, the growth of the multiples in Western Europe and the US has been dramatic. The decline in shop numbers is matched by an increase in the size and turnover of large stores. Retailing itself is probably not in long term decline, despite periodic collapses in consumer demand. The longer term trend is a structural readjustment in retailing, more or less advanced in different parts of the world. The nature of this change is simply that retail is becoming polarised - an international business at one end with relatively few, highly competitive major players exercising market power, and, at the other, small scale niche operations which are increasingly specialised and utilise low-overhead channels: kiosks, mail order, door-to-door selling. Statistically, the end result is fewer and larger outlets.
The story is being repeated today in countries like Japan and Italy which have long boasted of a fragmented retail sector with numerous small, often family-run, outlets. The trend seems to be universal, despite government intervention (France) and strong informal traditions (Japan) which would limit the size or numbers of supermarkets. Japan in particular is undergoing a dramatic transition in its retail sector thanks to changes in the law which have opened the territory to foreign retailers and spurred the growth of aggressive young domestic discount stores, known - after the successful US chain - as Wal-Mart wannabes .
The Competitve Environment
The competitive environment in retailing has three distinct aspects:
Horizontal competition covers compeition among retailers of the same type, and competition from new entrants of the same type into the market. Traditional economic theory tends to focus on this sort of competition, and IT is usually considered to concern itself in this context with cutting costs and increasing efficiency. Retailers might use IT to develop an information-based strategy, to use information and information systems to build competitive advantage, create new business opportunities, and add value.
Intertype competition covers competition among different forms of retailing all addressing the same market, and competition from new forms of retailing. For example, records and audio CDs are sold by specialist record stores, variety chain stores and convenience shops, by mail order, and through clubs. In future, consumers might even be able to buy music from a remote database of digitised recordings using a multimedia and telephone hook-up. The growth of intertype competition has been quite recent, and is often overlooked in traditional economic theory. It tends to polarise retailers who respond at one end of the market by becoming more specialised and at the other by carrying an ever-wider range of stock. New forms of retailing exploit changes in consumer life-styles and preferences, and adopt new technologies as central to their operations. Against such competition, existing retailers tend to be pushed into adopting ever-more critical technologies for managing, extending, and targeting their goods.
Vertical competition is usually supposed to arise from the relative bargaining strengths of suppliers, distributors and outlets. In principle, it may also cover the competing claims on consumer patronage by items within a store. In the complex sequence of negotiations and deals which constitutes a retail transaction, the retailer, the supplier and the customer all seek to maximise their advantage. Retailers may use IT to alter the balance of power within a transaction. They can, for example, gain advantage by targeted marketing or through the introduction of electronic trading relationships with their suppliers.
In retailing, the competitive environment is changing rapidly in all of these areas and retailers are increasingly encouraged to see IT, which offers them specific benefit through specific applications, as enabling them to achieve competitive advantage or, at least, a degree of control in turbulent conditions.
The Expressive Revolution
The term expressive revolution identifies the notion that consumers began to invest their purchases with a special significance. It has its roots in the post-war youth culture explosion, which saw groups of young people cohere around life-styles defined to a large extent by the clothes they wore, the make-up they used, the records they listened to, the magazines they read, and the vehicles they drove. This was a natural development of the growth of conspicuous consumption within industrial societies, but it had a specific and important character of its own.
To a large extent, the youth cultures of the 1950s, 1960s and 1970s were the products of the US s expansion into foreign markets (notably European and Asian) during and after World War II. For clear historical reasons, this was culturally led - popular music and Hollywood movies, in particular, presented images of freedom and ease with a strong resonance for war-torn countries. Chewing gum and nylon stockings, Cadillacs and Chevrolets, Camels and Coca Cola, Levis and zoot suits became icons of democracy - in the same way as the more recent openings of a McDonald s in Moscow or a K-mart in Prague have been triumphantly heralded. It was essentially American cultural imperialism which allowed Canadian academic Marshall McLuhan to coin the term global village to describe a world in which the media had created a sense of community on a planetary scale.
However, the youth cultures of the 1950s and 1960s were to a degree creative in their own right: theirs was more than brand awareness, it elevated the idea of a brand from a mark of qualityor reliability into a symbol of belonging. Far from being rooted in the solidity of an established name and reputation, the youth cultures focused on ready identifiability and rapid disposability. The key to stylishness was to be in the know, and it was a knowledge that was not restricted by class or income. In this sense, style purchasing is more than simple conspicuous consumption with which it shares many features. Conspicuous consumption, of course, is an increasingly significant component of individual and household purchases in affluent societies.
With the lifting of austerity and the lightening of cold-war gloom at the end of the fifties and into the early sixties, much of the western world went on a spending spree. American domination of the global economy ensured expanding world trade which, together with technological innovation, drove both the supply of and demand for consumer goods ever higher. In America itself, advertising expenditure increased from $3 billion in 1945 to $12-13 billion at the beginning of the 1960s. The spread of automobiles and domestic refrigerators/freezers encouraged the growth of large out-of-town supermarkets and consumer credit leapt from under $6 billion in 1945 to over $69 billion in 1963.
What happened in the US soon spread to other developed countries, borne on a tide of booming world trade. In the 1950s, world trade grew by an average rate of about 6% a year, comparable with the boom years of 1910-1914 and 1921-1929. But during mid-1960s the figure touched 10%, around half of which was accounted for by trade between the developed countries of the West. Domestic markets were carried along on the wave. In the UK, for example, the number of shops started to rise towards the end of the 1950s and reached a high in 1961. Employment in the retail sector peaked in 1971 and, for the whole of the sixties, retail value-added as a proportion of GDP remained at a plateau above 8%. [Table XXX - employment]
Fashion and style marketing have grown steadily since then. Youth fashions spread into the wider market. Punk music and punk fashion were tightly interwoven in Malcolm MacLaren and Vivienne Westwood s King s Road shop, variously named Let It Rock , Sex and Boy . Pre-processed foods supposedly cooked ... la film-star Paul Newman and so-called designer jeans bearing Gloria Vanderbilt s name heralded a new era of retailing in the 1970s and 1980s, when the attachment of a celebrity name to clothes, foods and other products was used to identify them with a particular lifestyle. The process eventually became so self-conscious that designers themselves and businesspeople were soon co-opted into the image-building process - Calvin Klein, Giorgio Armani and many others were themselves marketed, so their names would make their clothes marketable. Unlike Dior or Balenciaga before them, the process was aimed squarely at the high street and had little to do with the product itself.
Marketable designers soon had high street retail outlets of their own, where once they might have been satisfied with supplying labelled goods to established outlets. In complementary fashion, certain shop-owners have stamped their own images on to their product ranges: Anita Roddick of the UK s Body Shop chain, Luciano Benetton of the eponymous clothes shops, Richard Branson when his company owned Virgin shops, or even Sam Walton of Wal-Mart, one of the biggest retail operations in the world. Buying items in these shops carries with it an element of identification with the image presented by the shop-owners themselves.
Retailing in a Market Economy
In a market economy, retail outlets are the market - or, at least, they are arguably the most important part of it. For the individuals whose activities are ultimately the building blocks of any economy, the corner shop, the supermarket, or the clothes store are institutions as important as any within their experience. They may work in offices or factories, and eat and sleep in houses or apartments owned by landlords, banks or building societies, but increasingly they live in shops and restaurants. In strict economic terms, retailing is an essential component of the distribution of goods and services - shops and stores ar loci of exchange, they are the arena in which the price mechanism works and, as such, provide the practical foundation on which monetary systems operate on a national level. The centrality of the consumer remains a foundation of much economic theory as it addresses the changed world of perestroika, but the nature of the consumer s role changes with changing views of the market.
The key idea of neo-classical economics - that the free-market operates efficiently to regulate supply and demand - was largely discredited following the Depression of the 1930s as the mixed economy came to be the dominant model for most industrial societies - even those calling themselves Communist. The old free-market idea has now won a new lease of life and the words of a right-wing ideologue like Enoch Powell, written 25 years ago, seem to have a fresh and contemporary tone:
The free enterprise economy is the true counterpart of democracy: it is the only system which gives everyone a say. Everyone who goes into a shop and chooses one article rather than another is casting a vote in the economic ballot box: with thousands or millions of others that choice is signalled to production and investment and helps to mould the world just a tiny fraction nearer to people s desire. In this great and continuous general election if the free economy nobody, not even the poorest, is disenfranchised: we are all voting all the time. (`Freedom and Reality , Batsford Books, 1969).
Such sentiments resonate in the shattered societies of Central and Eastern Europe, for the simple reason that their economies are still driven by scarcity. An economics based on scarcity and the need to ration (or rationalise) the supply of goods must at some point see the operations of the market in just this light. But in economies driven by consumer demand for goods and services, where scarcity is no longer considered an issue - increasingly the view put forward in the developed economies - retailing has become more than just the channel through which the market works its miracle. It has an active role to play - supplying goods is not enough, the retail organization must now create and fashion demand. That the shopping mall is seen as a flagship of democracy is undeniable; it may even be a practical model of democracy. But storekeepers are not politicians, and they may be confronted daily by the failure of democracy to satisfy their requirement for profit. Where scarcity is not an issue, consumers are able to choose, and the risk for suppliers and storekeepers alike is that they will choose not to purchase. This risk is particularly keenly felt where the goods concerned require significant expenditure or effort in production or processing. As J.K.Galbraith pointed out in his book, The New Industrial State :
Technology, with its companion commitment of time and capital, means that the needs of consumers must be anticipated - by months or years. When the distant day arrives the consumer s willingness to buy may well be lacking... The needed action... is evident: in addition to deciding what the consumer will want and will pay, the firm must take every feasible step to see that what it decides to produce is wanted by the consumer at a remunerative price. (`The New Industrial State , Penguin Books, 1969).
Galbraith argues that the technology involved in production makes reliance on the untutored responses of the consumer risky. The argument has been constructed around the fact that a growing proportion of income in industrialised countries is spent on consumer durables - cars, household items, fashion products and electronic goods - which are infrequent purchases and require considerable investment and planning by manufacturers. Purchases of these items undermine the conventional theories of consumer behaviour: they are infrequent, typically made with imperfect knowledge of the market, and subject to the common distortions of conspicuous or lifestyle purchases. The competitive market doesn t really work for them.
Yet it is not technology as such that creates risk; farmers and market gardeners also eed foresight to guarantee a return on investment wherever consumer decisions are driven less by need than by choice. Abundance and expanding productive capacity undermine the simple operations of the market and encourage intervention. Under these circumstances, retailing is no longer a question simply of setting out one s stall. It is more often a question of determining where and when to set out the stall, what to stock it with, how much and how to persuade consumers to buy. The skills of marketing, advertising, promotion and PR are all brought to bear on the apparently simple transaction represented by a purchase. Even store layout and design have succumbed to psychological analysis and, of course, information technology now provides a powerful means of analysing consumer spending patterns, tailoring supply to particular groups and individuals, gauging the market and responding to its signals.
In the market economies of the late twentieth century, retail operations are no longer merely passive channels for the exchange of goods or services for cash. Nor are they often the habitats of the sovereign consumer. On the contrary, retail outlets often shape the market and they can determine consumer choices to a remarkable degree. Retail operations management is a minor science. More than that, the need to control the supply chain and to maximise profits ensures that retailers and manufacturers are locked together in order to control the very processes of production and consumption. In some cases, retailers are powerful enough to dominate this relationship; in other cases it may be the producers who use retail outlets to influence consumer choice. While the consumer s role appears to be central to modern economies, in fact the producer-retailer nexus is increasingly where the power resides. When a handful of giant companies dominates a sector of the market (as with supermarkets and their suppliers) it is no longer realistic to talk of an efficient and disinterested market mechanism or a continuous general election of the free economy . The ballot is rigged.
Retail operations have a peculiar place in the thinking of politicians who have identified the market as the focus of their attention. Stores deliver a cultural message increasingly important in an increasingly politicised world, but in a global marketplace, retailers are still almost always nationally or even locally rooted. Until quite recently, even the world s largest supermarket chains concentrated their operations in relatively small areas, only beginning to achieve national status in the last decade or so. A small number of multiples operate internationally, but the globalisation which characterises much manufacturing industry is hardly in evidence in retailing. [Table XXX - TRU] While the processes of exchange themselves underline the success of capitalism and the failure of command economies, the arenas in which exchange is carried out remain peculiarly insular - still tied to local markets even where the products on sale are international in character. When it comes to agendas of political integration, shopping is a distinct barrier to progress.
These notions are particularly clear in the attitude the European Commission took towards retailing within the context of the Single European Market. In 1991, the Commission published a Communication - `Towards a single market in distribution COM(91) 41 - in which it underlined the role that distributive trades had to play in the integration of at least 12 different economies. A summary document sets out the thinking:
Commercial supply of goods to consumers through the wholesale and retail trades is essential to the working of the [single] market. The commercial sector accounts for about 17% of output and employment in the Community, but there are substantial differences between the operations in the Member States; and there have been substantial changes in the last forty years. There are few companies operating across national borders, and small and medium sized companies (SMEs) in particular are restricted by national differences. (ISEC/B22/91).
The message is twofold - first, distributive trades represent sizeable proportion of the European economy (as they do elsewhere) and, secondly, that they embody national differences. These national differences are important not merely because of the barriers they may or may not present to the cultural and political integration of nations, but because they effect the way that retailers are likely to pursue the imperative to globalise. They may take the form of differences in demography, shopping hours, attitudes to technology, or taste. Of all economic activities, retail is the most tightly woven into daily life. Globalisation, which seems to be important for both market growth and political integration, has to contend with habit and custom.
For the European Commission, the growth of Europe-wide retail operations will indicate the success of the single European market, the foundation of political union. This is a topic fraught with difficulty, and it would be naive to think that the Commission did not, at some level, believe that European union would be strengthened if the 320 million consumers in the 12 current member states all shopped at Standa or Galleries Lafayette. Give the politicians an economic fait accompli and a strong union will follow. The question, however, is to what extent can retail businesses expand across national boundaries - if at all - given the real differences between national cultures and conditions.
The Commission has observed a universal tendency for the retail environment to become less fragmented and more organized. According to received wisdom - which the Commission shares - the tendency for the retail environment to become less fragmented is directly related to the growth of multiple ownership. Companies become fewer and larger; retail and wholesale operations become less distinct; ownership is concentrated. More manufacturers develop their own sales and distribution networks, and buy or launch retail outlets, while more retailers develop a manufacturing capacity.
The Commission has identified three general categories of retail environment based on the degree of penetration of multiples (particularly supermarkets). Germany, France and the UK belong in the first category, with a high level of penetration and the concentration of retail operations. Denmark, the Benelux countries and northern Italy are in the second category, with a medium level of penetration by multiples. Spain, Portugal, Greece, Ireland and rural Italy show a very limited intrusion by multiples and are, consequently, in the third category.
According to this view, there is a relationship between the development of the retail environment and economic/demographic factors such as population size, extent of urbanisation, and GDP. This relationship may be borne out by observation of other areas, like the US, where retailing retains a largely regional character notwithstanding the spread of Wal-Mart, K-Mart, McDonald s and Toys R Us. The fact that one can discern geographical trends even within the economically and politically integrated territory of the US supports the idea that a coherent retail environment depends on more than economic or political uniformity, and that the dynamics of the developing retail sector depend on finer-grained influences than even national trends. Table XXX suggests that the proportion of GDP contributed by retail tends to remain stable for reasonably long periods. If globalisation means convergence, then the relevant economic and demographic differences at regional, national, and local levels will have to be ironed out.
This is the nub of the problem. Retail operations find it difficult to achieve significant turnovers outside their home bases. Within countries they tend to be localised and where they operate across borders it is typically in only one or two countries. There are a number of reasons for the difficulty retail operations have in expanding beyond national boundaries:
differences in national laws dealing with matters as diverse as packaging, working conditions, and data protection;
differences in commercial structures which will make it difficult for large-scale, integrated organizations to expand into fragmented environments;
differences in commercial methods where cultural and commercial practices may hinder the development of a transnational retailing operation.
It s also true that managements are usually less global than the companies they run, and while the growth of retail operations does betoken an encroaching cultural uniformity, there may be strong resistance by one nation to the export of another nation s cultural assumptions. Of course, the reverse may also be true, so that many Parisians take a perverse pride in buying their clothes from the Paris branch of Marks & Spencer. Or a retail operation in one country may own outlets in other countries without determining their day-to-day operations or management. Such considerations will help to determine the character and fate of cross-border operations. For example, a manufacturer may have more success opening retail outlets in another country than a retailer would have trying to deal with foreign manufacturers. Similarly, franchise operations seem to work well across borders, because of the built-in autonomy they offer the shop-keeper, while mail-order or interactive television-based home-shopping can use marketing techniques based on lowest common denominator or culturally shared assumptions.
In East Asia, where state intervention has long constrained the market, joint ventures are allowing European, American and Australian retailers to enter the market. It has become popular to argue of countries like Indonesia that, while they are broadly-speaking underdeveloped, there may be more disposable wealth around than in, say, Portugal. And with information technology to help them, international retailers can operate, in a sense, out of space and time. But stores which establish themselves in isolated pockets of privilege can hardly claim to be global, even if those pockets are thousands of miles apart.
More generally, IT can help the management of a global operation where all the other signs are inauspicious. It offers the ability to communicate rapidly and productively, to track and analyse consumer behaviour, to tailor marketing efforts, pricing policies and stock control to local conditions, and to coordinate change at great distances. With the aid of IT, it is possible to manage a cross-border retail operation centrally, while allowing each outlet to respond to its local market: in other words, to create a global organization without a global market.
New technologies have already had a significant impact on the retail sector, although the adoption of such technologies is itself subject to cultural differences. For example, the French have happily taken to smart-card technology while their no less technologically aware neighbours in Italy are only slowly adapting to basic credit and charge cards. On a continental level, European retailers as a whole tend to lag behind their American counterparts. In Japan, the retail sector is more fragmented than in either Europe or US, but it is probably more technologically aware. For example, US manufacturers and retailers are aggressively adopting quick response systems relating production schedules to sales, while in Japan many small retailers rely on IT-based management tools which are used by only the largest multiples in Europe.
The reasons for these disparities are entirely cultural, since the technology itself is as readily available in Europe as it is anywhere else, although the question of standards is an abiding technical problem. The lack of fixed and universally agreed technical standards is often a major barrier to the spread of enterprises with a significant requirement for IT, particularly in areas like data communications, electronic data interchange (EDI), smartcards and even bar-coding. It is exacerbated by competition within relatively small markets (like individual European countries) and by the existence of national champions - like Bull, Olivetti, and Siemens in respectively, France, Italy, and Germany - with contending technologies to promote.
The potential of IT to help carry retail operations across borders, or to maintain the competitiveness of independents and unit retailers is itself compromised by these problems, while technological development itself is spurring on profound changes within the retail market as a whole.
The growth of electronic data interchange (EDI - the replacement of paper orders, bills of lading, delivery notes, invoices and so on by computer-based on-screen displays which can be transmitted and received electronically), combined with the encroachment of EPoS (electronic point-of-sale, which involves the registration of sales data at checkouts) and the spread of credit, debit and charge cards, is creating an entirely new paradigm for commercial transactions. The UK s National Westminster Bank recently unveiled its Mondex smart-card - a debit card with its own memory and processor which, NatWest hopes, could come to be used as a universal replacement for hard currency. While cash is about as likely to disappear as paper (remember the promises of a paperless office ?), over half of all commercial transactions by volume (more by value), according to most estimates, now involve neither cash nor cheque.
With cashless shopping, buying goods and services is an information transaction, and it is a quick card swipe from the automatic debiting of a bank account to the collection and analysis of valuable information about purchasing patterns, and consumers as individuals and groups. In itself, this raises issues of civil liberty and privacy which may intrude on the apparently unruffled progress of IT in retail. But it also raises the questions of how best to integrate the various technologies now appearing in the retail sector and what relationship new technologies will have to the old virtues of successful retailers - quality, choice, efficiency, helpfulness, friendliness.
It is now possible to create individually tailored environments for shoppers within a store. You might go to your local supermarket, type in a menu requirement for the week at a multimedia kiosk, and watch the system produce a list of items you need to purchase, complete with special offer prices for you alone. Or you might ask the system to make recommendations based on its records of your previous visits to the store, all the while showing you pictures of the items and menus it suggests.
As you navigate the store, the system might track you, signalling special offers on your trolley as you pass particular stacks. The shelf labels themselves might be intelligent, changing prices with the time of day or the weather conditions outside (special offers on umbrellas!). By the time you pass the checkout your trolley load will already have been priced, and the system will be waiting to receive your authenticated signature before deducting the sum from your bank account. Meanwhile, low stocks on the shelves you have visited will trigger a re-order to the warehouse; information on which lines are proving particularly popular will be passed to manufacturers and shippers; and the record of your visits to the store will be amended for future use.
This may sound too horribly inhuman to contemplate, but remember that half of it is already happening routinely. The real problem is not with the technology, which is both available and acceptable eventually to most people. It is not even with integrating the different systems involved - which is achievable in principle, if difficult in practice. The real problem is of a different order altogether: it is that such technology actually creates qualitative changes to the process of retailing. It is not just more efficient or faster or more profitable; it is altogether different. On the most obvious and dramatic level, the scenario we have described could actually make the store redundant, and this would have a major impact on the whole character of a retailer s business. From the retailer s point-of-view, therefore, an investment in IT - specifically, integrated systems - should not be made without an analysis of how the business operates at present, the strategic goals for business development, and the ways in which the technology will help attain those gols.
The Impact of IT
It is often observed that investment in IT is wasted if it does not meet the objectives of an organization. It is less frequently observed that the introduction of IT actually changes organizations.
In the absence of a precise and universally agreed definition, it s worth remembering that the expression information technology was coined to indicate the use of computers and communications devices for administrative, clerical and managerial tasks. The common assumption that IT merely automates such tasks is misleading, and it is important to make a clear distinction between information processing, on the one hand, and data processing and control applications on the other. Computers are successfully used to control already mechanised processes like assembly-line production, to collect and collate data and to automate clerical/administrative functions such as payroll which are themselves repetitive and mechanical. But information processing is different, involving by definition the communication of information to individuals and between individuals or groups of individuals. In other words, information processing is essentially a management function rather than an aspect of production or administration. The use of computers in essentially human social contexts involves infinitely more subtle and complex decision-making processes than dealing with machines and mechanised tasks. Despite persistent efforts at constructing intelligent computer systems to replace human decision-makers, IT can only support and facilitate human-centred processes, not substitute for them.
Inevitably, particular activities and organizational cultures will benefit (or suffer) to different degrees from the introduction of IT. IT has been enthusiastically adopted by many businesses whose activities depend on the flow of information - investment and banking, airline reservations and freight-handling, newspaper publishing and sales-order processing. In some cases, these involve routine tasks undertaken by the systems with little or no human intervention; in others, the technology is effectively a facilitator of human actions; and in a few, IT changes the perspective of an organization by giving it access to new information, powerful analytical tools and new synergies. Once adopted, an IT system may set in concrete procedures which would have been flexible when they involved less sophisticated technology, or it may free individuals and teams to work in more creative and productive fashion. The difference is in the nature of the business and its organizational culture.
Networks of microprocessor-based PCs are inherently more flexible and less structured than the old centralised mainframe running dumb terminals. So-called end-user computing, which puts processing power directly in the hands of the people using a system, flourishes in flatter, less centralised organizations. Here it is possible to create new and productive channels of communication between people in the same way that the network allows flexible communication between computers. Some organizations find this threatening, and typically invoke the spectre of security breaches wherever end-user computing rears its head. Undeniably, security is a major issue for networked systems, but it is rarely so vital that users must be prevented from doing their jobs better. The pressures from imaginative managements, from a competitive environment in which the quality of a company s information may make all the difference between success and failure, and from the users themselves, are changing even the most hierarchical and conservative of organizations. Where resistance survives to the increasingly information- and process-centred nature of contemporary businesses, the introduction of IT tends to create informal channels which effectively flatten organizations, often isolating pockets of resistance like the traditionalist data processing department.
The complexities of retail businesses makes the impact of IT a particularly rich area of study. On one level, much of the computerisation involved in retail operations seems designed only to automate already routine processes - checkout operations or stock-taking, for example. But information processing should allow th integration of these simple functions to provide a qualitatively different set of outputs. For example, checkout data can be collected at EPoS terminals and fed directly into an inventory management system; it can be analysed for patterns of consumption, the impact of promotional activities, and price elasticity. It can be compared with similar data from other stores or other times of the year for geographical or seasonal variations. It can be used to generate offer prices for selected products or even to advise on store layout. As a management tool, it may help identify pilferers or provide insight into changing consumer preferences early enough to steal a march on competitors.
In an era of rapid economic and social change, retail operations have sought to use IT predominantly for its ability to cut costs. In the mid-1980s, the introduction of EDI supported the then increasingly popular Just In Time approach to inventory management. This allowed many retailers - particularly in the food and household products areas - to cut their inventory. That alone can make tremendous cost savings, but when combined with powerful analytical tools, it allows significant improvements in speed and responsiveness to be made to the reassortment process (the mechanism of reordering items according to sales volumes). This means that shops can profit by reacting to trends in consumer preference at even a local level. Tables XXX and YYY reveal that, in practice, assumptions about what the benefits of EDI would be before it was implemented differed from the perceived benefits after implementation. The figures are based on 1,094 responses to a survey of US users conducted by EDI Research in 1988.
The Italian fashion business Benetton made a similar discovery when it found that what was essentially an administrative order processing system allowed the company to predict sales levels accurately and, as a result, to control its supply chain, focus the reassortment process and deliver customer service.
On a less dramatic but more thoroughgoing note, IT has helped promote the growth of multiples in the food and household products area like Wal-Mart and K-Mart. These two companies link all their stores and many of their suppliers by satellite data communications networks. Half a billion dollars of investment in IT propelled Wal-Mart into national and, at least potentially, international prominence. K-Mart has met troubled times recently, but this may be because it has expanded too fast.
The mid-1980s saw a rash of mergers and acquisitions by multiple supermarket operations, particularly in the US and the UK. According to Michael Earl, director of the Oxford Institute of Information Management:
The 1980s concentration marks: a transition from family dominated concerns to corporate entities; diversification across sector boundaries; rationalization; and the achievement of critical mass and economies of scale. This last ... is particularly based on maximizing purchasing power over suppliers, of (sic) affording and developing out-of-town shopping sites or redeveloped city properties, and affording and combining IT networks and systems. The 1980s new entrants and retailing innovations, however, were often based on revolutionary distribution, design or outlet approaches which were sometimes made possible by technology, such as computer-aided design, electronic point of sale, supplier networks and teleshopping. On the one hand the required investment for IT is significantly higher than in the past and on the other hand the capability to exploit these new technologies is differentiating the winners from the losers. In the retailing sector, IT therefore is both a cause and an effect of structural change. (`Management Strategies for Information Technology , Prentice Hall, 1989).
In some areas, it has become impossible to ignore IT. In highly competitive businesses like food retailing, where consumers can and do compare their bills weekly and may switch allegiances equally rapidly, large-scale operations must offer low prices, or consumer choice, or both. With thousands of items in stock, thousands of customers each week and hundreds of individual product pricing decisins to be taking, the traffic in raw data in such an organization will itself be enormously complex. If the necessary narrow margins are to be maintained, the organization will need to cope with the demands of controlling the supply chain, scheduling deliveries, coordinating promotional activities, facilitating customer care policies, and managing properties, personnel and cash, as efficiently and profitably as possible. It may be that this can be done without IT - the evidence, however, suggests that only alternative is bureaucracy, and this is certainly more expensive and less efficient than IT. Once one organization has adopted an IT-based solution to the problems of managing a large-scale operation, its competitors follow suit or die.
Increasingly, the economic landscape is being driven by the requirement to adopt IT systems, not because the systems themselves are great news, but because they are required for the efficient management of information- and process-based companies. The unit retailer can use his or her own eyes, ears and brain to collect and analyse all the information required to satisfy customer demand and set appropriate pricing levels. The multiple has a different problem altogether, since profitability depends on economies of scale, and control of the supply chain, purchasing and finances at a national and even international level, while actual operations are based in a particular location catering to a particular market. The effective (two-way) transfer of information between local outlets and central management in a large-scale retail operation cannot be achieved without IT.
The inability or unwillingness to appreciate and act on this is a barrier to growth, which may limit businesses if it does not kill them. And this, of course, is a matter of encouraging appropriate understanding and skills at every level of an organization. For some, this may mean training to operate equipment, for others it will mean training in the use of management information systems (MIS) and decision support tools. Even senior management should be encouraged to develop new perspectives, because information- and process-oriented businesses will be in a constant state of flux.
EPoS requires MIS [management information systems] and buyer/merchandising information processing skills behind it, says Michael Earl in a cautionary tale. A major retailer, was a leader in EPoS. Whereas early cost savings and efficiency gains materialized, the data from EPoS which improve (sic) understanding of market needs and apply leverage to relations with suppliers lay untapped. The merchandisers and buyers had no tradition of, or capabilities in, computer-based MIS. The retailer then introduced telecommunications-based supplier links to improve supply-chain management and make buying and merchandising more sales-led, driven by EPoS data. However, many of the buyers and merchandisers still resisted technology and would not either load data into the system or change their decision behaviour.
The point is that IT will change the way organizations work and may threaten the way individuals have learnt to do things, and even their jobs. It can be viewed with fear and introduced without vision. This is likeliest to happen in organizations which are hierarchical, centralized and rigidly structured. Such organizations may not need IT and ought to think carefully about its introduction. Retail businesses seeking to expand beyond their home bases or into other business areas cannot afford to be too rigid and focused. The likelihood is that they will have to adopt IT; the implication is that they will have to be prepared to adapt to the changes it will bring.
Integrating supply and demand and managing the reassortment process
Benetton is one of the few retailers to achieve real multinational success. With operations in some 75 countries and nearly 6,000 outlets, Benetton is also unusual in still being effectively a family business, although a public company.
The company was founded in the late 1960s in Northern Italy, its core business then as now being the design, manufacture and sale of fashion clothing. It is a highly centralised company, and has evolved away from manufacture and retailing in its own right to design, distribution and management. Over nine-tenths Benetton s products are manufactured in Italy, but only a fifth of these are manufactured in-house, the rest being sub-contracted. Stores are franchised - a form of retailing which succeeds well across borders - and trade exclusively with the parent company through local agents. As a fashion business, Benetton produces two collections a year - one in the spring and one in the autumn. These are shown to the franchise-holders who place orders according to their local markets and may reorder on an on-going basis. Benetton s marketing strategy focuses on the wide range of colours its lines are available in. Its advertising slogan is The United Colours of Benetton .
Benetton has long been a committed IT user, and since the mid-1980s - the period during which the company s major growth occurred - IT has grown in importance. Between 1984 and 1988, Benetton s turnover more than doubled from just over L700 billion to nearly L1,700 billion, its net income increasing by a marginally higher factor to L115 billion. The growth itself cannot be attributed to IT, although many commentators have cited the company s innovative use of technology. On the other hand, without IT, growth at this rate across national boundaries would probably have caused net income to decline. The fact that it held up and even increased as a proportion of revenue indicates that the company achieved significant economies of scale in expanding.
The key to these economies was the utilisation of a wide area network linking local agents to the company s headquarters. Agents could enter orders at any time onto their office PCs which would be regularly polled by Benetton s central mainframe. Orders would be despatched from stock wherever possible or passed to Benetton s own plants or suppliers for manufacture as part of a regular production cycle.
The company soon discovered that the information they were receiving from the agents had a high predictive value. Within a few days of each production cycle, Benetton could assess with surprising accuracy the volumes of each item and - in particular - each colour that would eventually be required. This enabled them to improve their forward planning and to cut inventory. But it also suggested that a systematic approach to reordering might be adopted with the help of information technology.
A new project was started in 1986 to develop an agent information system which would provide comprehensive facilities for order entry throughout the supply chain - from agents to headquarters and from headquarters to suppliers. The agents were to have access to data on customers, stock items, prices and existing orders, and would use the system for order entry. The head office would use the system for order confirmations, stock control and manufacturing logistics.
The major benefit of the system - which was introduced in 1987 - has been that it allows very accurate control of reassortment, the process by which the best-selling items in any range are reordered. To maximise their returns, retailers inevitably reorder differentially: fast-moving items will be reordered in greater quantity than slow moving items, even where both have sold out. In a fashion business, reassortment is the key to profitability - the accurate reflection of customer preferences in stock is the best way to ensure rapid turnaround and improved volumes.
Increased sales can be achieved by opening more outlets or selling more items per outlet. In the late 1980s, Benetton was was also aware that the former option was problematic. The company had already expanded into most of Europe, North America, Japan and South East Asia, and the Middle East. But the problems of operating internationally could not be underestimated. The company was able to exploit economies of scale because it found, or was able to impose, a certain homogeneity in each of the markets in which it operated, largely by appealing to a well-defined but limited market segment. Its very effective niche marketing would undoubtedly suffer if the shops became too common, and it would undermine its own design and manufacturing economies if it expanded out of its niche. Continued growth meant increasing the company s sales volume In the medium-term, the company would inevitably seek to extend its product range, but in the shorter-term, growth meant, in effect, encouraging shops to order more and sell more. But individual shop-keepers are unwilling to order speculatively, and in a fast-moving fashion businesses, they will want guaranteed fulfilment of orders within a few days at most.
The new agent information system addressed these problems by allowing Benetton to extract information on customer preferences rapidly, to communicate important information to all its agents regularly, and to manage reassortment efficiently. A limited number of lines are identified as the most popular within each new collection as it is shown to franchisees, and these are produced in advance in undyed fabrics using sales forecasts based on previous performance and agent reports. The agent information system identifies the popular colours for each new season s range as consumers buy the items, and this allows Benetton to purchase the necessary raw materials. Benetton is able to inform its agents regularly about the availability and delivery times of reassortment items. The agents collect reorders from each shop in their area and enter these onto their networked PCs. The PCs are polled frequently and receive order confirmations from head office. Orders are processed overnight and the required items can be dyed, finished, packaged and dispatched within three days. Delivery takes less than ten days anywhere in the world.
In this way, information gathered by the system from sales and agent reports is used to direct the manufacturing process. Shop-keepers are able to reorder items they know are popular and have them delivered quickly enough to satisfy the market, while Benetton as a whole can predict sales volumes for each collection with a high degree of accuracy.
The information revolution is less the product of a single invention than the result of the convergence of technologies.
IT is having a profound effect on retailing, transforming its priorities from the distribution of goods and the satisfaction of demand to the management of processes and relationships.
Over the last decade or so, the growth of the multiples in Western Europe and the US has been dramatic.
The longer term trend is a structural readjustment in retailing, more or less advanced in different parts of the world. The nature of this change is simply that retail is becoming polarised - an international business at one end with relatively few, highly competitive major players exercising market power, and, at the other, small scale niche operations which are increasingly specialised and utilise low-overhead channels: kiosks, mail order, door-to-door selling.
The competitive environment is changing rapidly and retailers are increasingly encouraged to see IT, which offers them specific benefit through specific applications, as enabling them to achieve competitive advantage or, at least, a degree of control in turbulent conditions.
The expressive revolution meant that consumers began to invest their purchases with a special significance, extending the notion of conspicuous consumption characteristic of late industrial societies.
Retail outlets are neither passive channels for the exchange of goods or services for cash, nor the habitats of the sovereign consumer, but often shape the market and determine consumer choices.
The need to control the supply chain and to maximise profits ensures that retailers and manufacturers are increasingly locked together to control the processes of production and consumption.
Globalisation is important for both market growth and political integration, but retail operations find it difficult to achieve significant turnovers outside their home bases and retailing remains a parochial activity.
There seems to be a universal tendency for the retail environment in different countries to become less fragmented and more organized, due largely to the growth of multiple ownership.
New technologies have already had a significant impact on the retail sector, although cultural differences and the lack of technical standards slows their adoption.
IT promises dramatic changes which may profoundly affect reatil operations, and any significant investment n IT demands an analysis of how the business operates at present, the strategic goals for business development, and the ways in which the technology will help attain those goals.
The introduction of IT actually changes organizations, and its implementation should be considered an on-going process: the perceived benefits of IT are frequently entirely different from the reasons for introducing it in the first place.
Adaptation is easier in organizations with looser and more flexible structures.
-end chapter two-