How digital technologies are transforming retailers

Although many companies have established a digital presence—a website, some digital advertising, a presence in social media—only a small percentage are truly tapping the potential of an omnichannel strategy. To enable maximum digital impact in stores, retailers must first drive organizational change in four key dimensions.

R&D needs to be taken seriously to drive digital innovation. To make a significant impact with in-store digital strategies, retailers need to budget for digital innovation. Devoting funds to digital ventures signals that the company sanctifies initiatives that might otherwise be deemed too risky or tangential. Digital-innovation strategies are typically not prioritized within the overall IT-investment budget. For most retailers, IT funds are limited and spent primarily on maintenance and upgrades of backbone technology systems that support merchandise and supply chain functions. R&D need not be a major investment—even a small R&D budget of $100,000 annually should be enough to infuse digital experimentation into a re-
tailer’s daily operations.

Although pure-play online retailers such as Amazon.com and Zalando have taken calculated risks and embraced the notion of “failing fast,” physical retailers are accustomed to a much more conservative culture. But competing in digital requires a new mind-set. Some of the major players, such as Nordstrom and John Lewis, are leading the way through bold experimentation. For example, Nordstrom announced in 2014 that 30 percent of its capital expenditures would be in technology. It has established an innovation lab in Seattle to develop and test new products on a weekly basis; invested in e-commerce companies such as Bonobos, Trunk Club, and HauteLook to merge the online and in-store shopping experiences; and implemented interactive touch screens in fitting rooms, to name just a few initiatives.

Set up new organizational models to manage innovation. Developing digital solutions in stores to enhance the customer experience should not be viewed as an IT responsibility. The most successful models of innovation merge IT teams, which should understand the digital-technology landscape, with retail teams that know the operational challenges and customer base. (See the sidebar “Digital Innovation in Action.”) Some successful models of collaboration are as follows:

  • Store Employee Teams. In-store associates, supported by IT, are given the responsibility to explore new technologies that can enhance the retail experience. These experiments may focus on behind-the-scenes operational efficiency or customer-facing digital initiatives.
  • Business and IT Teams. Lean start-up-like teams inside the company are formed to develop close-to-customer innovations. These teams can focus on quick wins by staying highly responsive to customer needs.
  • Innovation Labs. On-site or off-site innovation labs can help companies discover and explore digital strategies that will shape the future of retail. Some companies looking to lead the digital revolution—such as Walmart, Target, and Kohls—have set up off-site innovation labs in the epicenter of global technology innovation: Silicon Valley. Others—such as Staples, Nordstrom, and Sears—stay closer to home, at headquarters or in nearby urban environments with access to creative talent.
  • A Portfolio of Start-Up Companies. To get in on the ground floor with the latest technologies, retailers need to think creatively about partnering with start-ups. Some retailers are funding start-ups (much as private equity firms do). Others are allowing start-ups to run pilot projects in the store. Kroger, for instance, recently announced a pilot program with start-up Strap that brings wearable analytics technology into the store. Some retailers are bringing start-ups in-house (serving, in effect, as incubators), providing a base of operations for innovation.
  • An Ecosystem of Solution and Content Providers. Retailers that want to ramp up their digital environments quickly and efficiently have partnered with third-party players including retail-technology start-ups, established technology giants (such as eBay and Google), and universities. This option is especially beneficial for retailers lacking a core strength in digital capabilities and smaller players with a highly digital-aware customer base.

Develop an information architecture that provides meaningful insights into customer behavior. Retailers, as they delve more deeply into digital commerce, have the potential to unlock a wealth of data on customer behavior, transactions, and consumption patterns. By providing valuable information on the end-to-end customer journey (acquired from physical stores, supply chain vendors, and banks), this data can yield insights that enable retailers to improve the customer experience, build loyalty, and enhance operational efficiency.

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