It’s time to make the hard decision

Toyota, as you’ve probably heard, is shutting down operations in Australia. This has triggered the expected wave of commentary claiming that this is the end of manufacturing in Australia and that unless the government does something about this industrial relations problem then the entire car manufacturing supply chain (i.e. everything from final assembly back) will collapse with disastrous consequences for the Australian economy.

This point of view is both disingenuous and unhelpful as it ignores the fact that the viability of car manufacturing in Australia is strongly influenced by both economic trends outside our borders and by systemic challenges within the car industry itself. Australia might be an island, but that does not mean that events outside our borders will not affect us. Industrial relations might be part of the challenge, but it’s not the whole story.

Pouring more money into the domestic car manufacturing supply chain may provide short term relief, but it does not address the root cause of the problem.

We need to make the hard decision.

If car manufacturing is to be part of our industrial mix in the longer term then we need to transform the domestic industry, creating a new operating model that enables a stable manufacturing industry in Australia within the global context.

If we cannot create a sustainable car manufacturing industry in Australia, then we should immediately start to transition the resources (people and assets) to new industries that do have a future here.

Simply propping up an industry who time has come will only ever be a short term solution, and one which is a disservice to the generation just entering the workforce.

Capital has won over labour

The global car industry is in trouble. There’s too many factories and not enough people buying cars.

Similar situations are not uncommon in other capital intensive industries. Decades spent automating and streamlining processes has transferred costs from labour to capital. This has been great for customers as it lowers the unit cost of the goods manufactured. The manufacturers, on the other hand, find that their business, or even their entire industry, can all too easily be pushed into a never ending cycle of boom-and-bust. We only need to look to containerisation and the development of the global container network to see these forces in action.

Containerisation transformed the old, manual, approach to shipping into a highly automated and efficient global logistics network. Goods were packed into large metal containers and craned onto and off ships, rather than relying on stevedores to manhandle individual barrels. This resulted in a dramatic reduction in shipping costs and time (somewhere between 60% and 80%), since the majority of the work was in the manual loading and unloading.

However, building a container network required a huge investment. New ships were commissioned, larger ships with complex racks to hold the containers. Fleets of containers were required to carry the goods. Docks also need to be changed from the fingers sticking out of a bank that was suitable for manual loading, to the large container terminals that host huge cranes.

These investments allow shipping companies to slash the cost of shipping. It also made these businesses very inflexible. Previously shipping companies could trim costs when demand dropped off, parking ships and laying off their crews. Now, with huge investments in container infrastructure, the shipping companies were forced to keep the boats moving during the down turn, as the revenue was needed to service loans or pay dividends to investors.

Times were good when demand was high, with the low shipping rates helping to drive volume up. When times were bad when demand was low, as the boats needed to keep moving even if it meant that they were losing money.

Car Manufacturing in Australia

Australia finds itself wanting to protect its traditional car manufacturing industry when the dynamics of the global car industry and economy conspire against us.

Car manufacturers need to improve factory utilisation if they are to remain profitable. Shutting factories down for a few weeks is not enough, nor is trimming labour rates, as the majority of their costs are in the plant and equipment contained within these factories, and not in the labour required to operate and management.

With too many (expensive) factories and not enough people buying cars, car companies are looking to consolidate their operations. Ideally the final resting place for these factories will be adjacent to major markets in a comparatively low cost geography. (Despite the balance of costs being in equipment, moving from a high to a low cost geography can still shave 10% off the total cost of manufacturing.)

Similarly, reducing the time from final assembly to delivery to the customer by placing the factory as close as practical to the customer, helps to reduce costs by reducing the time it takes for product to flow through the supply chain. This cuts the amount of working capital required as well as cutting the time required to push product updates through the supply chain.

Ideally, given current manufacturing technology, one of these manufacturing centres will be right in the middle of South-East Asia, enabling quick and convenient access to the the fastest growing car markets in the world. Thailand looks good. Another would be somewhere in the centre of the Americas, allowing it to service both North and South America. Perhaps Mexico or the southern states of the US? Eastern Europe might get a look in for a third manufacturing hub, but then it might just be easier to service Europe out of S.E. Asia or the Americas. (Note that niche plays such as BMW are the exception to this rule, as they are not selling into the mass market.)

So what does this mean for car manufacturing in Australia? Australia fairs rather badly on both the dimensions we just considered.

As a high cost country we can expect cars manufactured domestically to cost roughly 10% more than those manufactured in a low-cost hub. Unfortunately wage bargaining will be little help unless we’re willing to slash wages to the same levels as Mexico and Thailand, which is something that the Australian public is unlikely to find palatable.

Our position below S.E. Asia and a long way from the US and Europe also puts us at a disadvantage. While shipping a car from Australia to S.E. Asia, the Americas or Europe will not significantly affect the final price, the delay pushes up working capital requirements while the longer supply chain is more challenging to manage.

We can’t expect our domestic car industry to export its way out of this problem. Nor is the domestic market large enough to sustain it when cheaper imports are flowing in from overseas manufacturing hubs. The car industry is, after all, a global industry.

Pouring money into the industry might support it in the short term, but at what cost? If it cannot complete globally then it will eventually succumb to the pressure. And given the perilous state of the global and domestic car industries, that time will probably be sooner than later.

In the mean time we’re encouraging a generation of eager and talented young adults to build their lives around a career and an industry that we know will no be able to support them. They deserve better.

Can technology save us?

One solution to our dilemma is to find a model for the industry that can work for Australia.

Consider, for a moment, the replicator from Star Trek. Or, if you’re less inclined to science fiction, the recent explosion of 3D printing and the maker movement.

If we can slash the investment required to manufacture cars by slashing the investment required to build a factory, then the decision on where to locate that factory might tip in our favour. If a rather large 3D printer costing AU$10,000 could print a car, then every dealer would have one. Why ship a finished car from one of the manufacturing hubs when you can pick the model and options you want, have it printed, and pick it up in a day or two.

3D printing might be some way off, but there are people out there looking at this problem. iStream, for example, is the result of looking at the manufacturing process to see if there is a better, faster and cheaper way to manufacture cars. The result is a manufacturing plant that is 20% the size of a conventional factory, and which reduces the typical capital investment by up to 80%.

If we can use technology such as iStream, or one of its descendants, to reduce the factory footprint then we might be able to arrive a solution that can be sustained by our domestic market.

Taking this path would require an investment at the national level. The major car manufacturers are struggling with their older, more capital intensive, operating model and have no interest in a new approach. If we are to take this route then we cannot rely on the existing brands.

Should we cut out losses?

If technology cannot save us, if the consensus is that it is not possible to build a sustainable, mass market, car industry in Australia, then we need to consider our options.

Should we copy a page from Germany’s playbook, and invest in building a high-value, niche industry? An Australian equivalent to BMW or Mercedes?

Or are there other manufacturing industries that can absorb the work force? Should we, for example, invest in becoming the leading manufacture of pre-build housing? (We already have some form in this area.) What industries can we excel in? As others have pointed out, ending car production is not the end of the world.

It’s time to make the hard decision

Pointing out the key role the car industry has historically played in our economy, and focusing on how we might keep the industry alive, is ignoring that fact that the domestic troubles are part of a larger global trend, a trend that we can do little about.

Regardless of the path we each, as individuals, prefer, the debate we need to having is on how will we choose between the the options available too us.

New Business Models Need New Approaches to IT

Dominos

I have a new post up at CIO of the FutureNew Business Models Need New Approaches to IT. This post brings together a couple of things that I’ve been thinking about recently.

The first is the debate around who will ‘own’ IT in business. Will it be the CIO, the traditional ower of IT? Will it be a different department, such at marketing which has become the big spender on IT in the last few years? Or will be be some new department with a new leader, one that subsumes the current IT department just as the IT department and CIO took over from the Data Centre Manager? All of these options seem short sighted to as they appear to be only addressing the symptoms and not the cause of the problem.

The second thing I’ve been thinking about is anti money-laundering (AML) and counter terrorism-financing (CTF) regulation, since I’ve just done an update to the Technological Considerations of AML/CTF Programs piece published by LexisNexis as part of their Anti-Money Laundering and Financial Crime publication. A side effect of some of the new regulation in this space is that many more companies might be pulled into the regulatory framework – both public and private companies – due to their use of or integration with complimentary currencies. This has interesting implications for enterprise-wide governance models.

My ah-ha moment was when I realised that the debate we’re seeing around the role of the IT department and CIO would be better framed as a question on how IT should be governed in the new digital businesses that are emerging at the moment. Or, as I said in New Business Models Need New Approaches to IT:

Instead of focusing on who the new owner of IT might be, the question we should be asking ourselves is “How does a digital business consume (govern) information technology?” This is an important question, and one that we need to delve into more deeply. (Indeed, I like to keep posts fairly compact but this one post was roughly 2,000 words by the time I was happy that I’ve had covered the issue.)

It’s a long post, but the question is a nuanced one that needs that many words to work through the issues. I recommend that you head over to CIO of the Future and read it, and leave your thoughts in the comments.

Image source: mckinney75402

Bitcoin might make AML/CTF regulation a problem for everyone

I spent a little time over the break thinking about what’s happening with anti money-laundering (AML) and counter terrorism-financing (CTF) regulation, since it had come time to update the Technological Considerations of AML/CTF Programs published by LexisNexis as part of their Anti-Money Laundering and Financial Crime publication. (There’s a blurb for my part embedded below.)

The interesting shift in this version is that growth of AML/CTF regulation for complementary currencies (ie. currencies that are not backed by a government). Organised crime groups are finding all sorts of creative ways to use complementary currencies to launder money, including the creation of bitcoin ‘mixers’ that are intended to improve anonymity for bitcoin transactions.

A side effect of this regulation – which is largely targeted at bitcoin but which is been written in a way to bring all complimentary currencies under regulation – is that the points-based loyalty programme that you were thinking about introducing might actually bring you under the AML/CTF regulator’s watchful eye. Something as ambitious as Facebook Credits definitely would.

This has all sorts of interesting implications for enterprise-wide governance, but that’s a different discussion since it’s well beyond the scope of the Technological Considerations of AML/CTF Programs piece.

If you’re interested then head over to LexisNexis (or we can catch up for a coffee if you like).

Image sourceMike Cauldwell

Manufacturing is not returning to the West

There’s many claims over the last year or so that “manufacturing is returning to the West” and “China’s days as the world’s factory are numbered”{{1}}. These claims are misguided.

[[1]]Vivek Wadhwa (23 July 2012), The End of Chinese Manufacturing and Rebirth of U.S. Industry, Forbes[[1]]

We’ve just reached a time where manual and skilled labour is no longer a major manufacturing cost, causing final assembly to slowly drifting toward the customer base it serves. This shift reduces the length of the supply chain from assembly to your front door resulting in a reduction in turn-around time which, in turn, reduces working capital requirements and allows manufacturers to push product updates through the supply chain faster.

Manufacturing isn’t leaving China and other low cost manufacturing centres. What has changed is that it now makes good sense to manufacture some high value but low volume and bulky products in other major markets, such as the U.S.

The problem with thinking that manufacturing is returning to the first world is the implicit assumption that this also means that the old manufacturing jobs will return. They won’t. They no longer exist. It also ignores that fact that the huge scale of manufacturing in China will help it to grab the lions share of the world manufacturing market for some time to come.

Manufacturing as a manual process

Consider Henry Ford’s assembly line from 1913: a complex, labour intensive process that created a large number of good, blue collar jobs.

566px-Ford_assembly_line_-_1913Source: Public Domain

When we think of manufacturing this is the image we usually have in head. It’s a bit like those train crossing signs that have a caricature of a steam engine on them. It might not be the current reality, but it’s the image we use to understand what’s going on around us.

As transport costs dropped, work moved to lower cost countries

Back in Henry Ford’s day transportation was expensive. Factories were often located close to the markets they served to minimise transport costs, with management struggling to ensure that enough raw materials arrived at the factory to keep it busy. However, the development of railroads, steam ships, and the shipping container network incrementally cut the cost of transport until it cost roughly the same to move a box across the world as it did to move it across the country.

As Marc Levinson points out in his book, The Box{{2}}:

[[2]]Marc Levinson, The Box: How the Shipping Container Made the World Smaller and the World Economy Bigger. iBooks.[[2]]

As transportation costs decline relative to other costs, manufacturers can relocate first domestically, and then internationally, to reduce other costs, which come to loom larger. Globalization, the diffusion of economic activity without regard for national boundaries, is the logical end point of this process. As transport costs fall to extremely low levels, producers move from high-wage to low-wage countries, eventually causing wage levels in all countries to converge. These geographic shifts can occur quickly and suddenly, leaving long-standing industrial infrastructure underutilized or abandoned as economic activity moves on.

This is the shift we’re thinking of when we consider off-shore manufacturing: China as the source of cheap (and fairly unskilled labour).

Today, manufacturing is not a manual process

Apple released an interesting video the other day{{3}}. It shows the manufacturing process for the new Mac Pro.

[[3]]Greg Koenig (22 October 2013), How Apple makes the Mac ProAtomic Delights[[3]]

SourceApple

What’s interesting about this process is how few people are involved.

Manufacturing has changed a lot in the last few decades. What was once dominated by manual labour is now an automated and highly efficient process. Machines have replaced people. We can see this in many of the factories that are returning to the West: they’re all highly efficient, highly automated, capital intensive operations that require very little manual or skilled labour.

7395855880_053e6daede_cSource: Steve Jurvetson

Machines, however, have yet to replace engineers

While capital has won over manual and skilled labour, that same is not true for engineers: knowledge workers.

As Roger Martin found in his research for a recent HBR article{{4}}:

[[4]]Roger L. Martin (October 2013), Rethinking the Decision Factory, Harvard Business Review[[4]]

I vividly remember working with the CEO of one of North America’s largest bread manufacturers in 1990–1991. He had just replaced a labor-intensive and antiquated plant with the most advanced bread bakery on the continent. He proudly told me that the new computerized ovens and packaging machinery had reduced direct labor costs by 60%. But meanwhile, a throng of new and expensive knowledge workers had been added at both the head office and the plant—engineers, computer technicians, and managers—to take care of the sophisticated computer systems and state-of-the-art equipment. The new plant wasn’t quite the unalloyed good that it appeared at first sight. Variable costs of manual labor fell, but the fixed cost of knowledge workers rose, making it critical to keep capacity utilization high—which was possible in some years but not in others.

While the West has been worried about losing it manufacturing capability, many of the off-shore manufacturing destinations have been investing in education. China, for example, now has a huge engineering workforce that companies can draw own to sort out their manufacturing problems.

It’s this incredible ability to mobilise huge workforces that is keeping many manufactures in China. An article in the New York Times from last year has an Apple anecdote that shows this in action{{5}}.

[[5]]Charles Dugigg & Keith Bradsher (21January2012), How the U.S. Lost Out on iPhone Work, The New York Times[[5]]

Another critical advantage for Apple was that China provided engineers at a scale the United States could not match. Apple’s executives had estimated that about 8,700 industrial engineers were needed to oversee and guide the 200,000 assembly-line workers eventually involved in manufacturing iPhones. The company’s analysts had forecast it would take as long as nine months to find that many qualified engineers in the United States.

Moving closer to the customer

The rapid pace of change in today’s market is driving companies to reduce the time between final assembly and when the product drops into the customer’s waiting hands.

Zara is the poster child for this shift, with a supply chain can create a new product and then have it in the stores in around two weeks. Zara has used this ability to disrupt the traditional annual, seasonal fashion cycle, resulting Zara becoming one of the largest retailers in the world.

Apple’s recent decision to make the Mac Pro in the U.S. is part of a trend to move the manufacturing of high value but low volume and bulky products closer to the customer. Elon Musk’s Tesla is also part of this trend.

Manufacturing automation technology has reached the point that it makes more sense to locate the manufacturing of these products closer to the customer, allowing transport costs and delivery times to be minimised.

We shouldn’t assume, however, that this trend will end with manufacturing returning to the West.

It’s easy to forget the more people live in Asia than in the entire rest of the world combined. If manufacturing is moving to be closer to the customer, then we need to remember that there are more customers in Asia than in the rest of the world. China’s position as a manufacturing powerhouse appears safe for the time being.

CK6aONG

Source: valeriepieris

What we mean by “export” is changing

So just where will this trend take us? (And, by extension, will our old export industries return, bringing their jobs back with them?)

The future of manufacturing and export seems – like to many industries – connected to the knowledge economy.

Those old manufacturing jobs are never coming back. They no longer exist. Similarly, thinking in terms of operating a factory and then exporting to another country is also looking somewhat antiquated.

Today (or perhaps, tomorrow) a manufacturer is a simply company that is run from one country and, from there, manages the sale of products in another.

Kogan{{6}} is a great example of this. The business is run from South Melbourne, Australia, which is where the products are designed. The products themselves are made in China and (in many cases) shipped directly to the United Kingdom where they are sold via the company’s UK web site (which is also managed from Port Melbourne, but hosted somewhere “in the cloud”).

[[6]]Kogan @ PEG[[6]]

An even more interesting example is another local business which sells safety barriers that are placed around robots in factories to ensure that workers aren’t accidentally injured. They recently started exporting to Europe. They did this by setting up a small, automated factory in Germany to service the European market. The barriers are designed in Australia and the designs are beamed directly to the machines in Germany, machines that consume resources from all over the globe.

So manufacturing – as we’ve traditionally understood it – is not returning to the West. The blue collar jobs that went overseas are not coming home to give our rather lacklustre economies a boost.

We can also expect China to remain an manufacturing powerhouse for the foreseeable future. The huge scale of operations over there, and the ability to rapidly redeploy these resources, will allow China to grab more than it’s fair share of the world manufacturing market.

Manufacturing, like so many industries{{7}}, is changing, and changing rapidly. What’s most interesting though, is how a new generation of companies are emerging that are finding ways to exploit this situation to “export”, and create new, knowledge intensive jobs at home in the process.

[[7]]The destruction of traditional retail @ PEG[[7]]

Source: Steve Jurvetson

Malls are the casinos of middle class suburbia

The department stores are empty but the malls (or at least the malls here in Australia and nearby in China and South-East Asia) are full. Why is there such a difference when department stores and malls seemingly offer shoppers the same thing: Chanel, Yves Saint Laurent, Prada, Vivienne Westwood and Alexander McQueen (and a bunch of lower status retailers) all under one roof?

While department stores have been in decline for at least the last thirty years{{1}} many malls have never seemed busier. The crowds we expect at the mall during Christmas are popping up every other weekend, forcing us to park at the far corner of the back parking lot before running through the rain only to arrive at the mall proper just in time to catch our film.

[[1]]Winners and Losers in Retail @ PEG[[1]]

As I pointed out in The Destruction of Traditional Retail{{2}}:

[[2]]The Destruction of Traditional Retail @ PEG[[2]]

Department stores [bring] together a collection of departments, each selling a different type of product, where a department could be a small to mid-sized store on it’s own.

Department stores traditionally offered the aspirational suburbanite or rural visitor an opulent setting where they could while away the day drifting from shoes to cosmetics with a stop for a light lunch and a visit to the bookstore, florist or hairdresser. They would make the long trip to the centre of town (or to the city even) for that much needed pair of shoes and formal dress, only to find themselves spending the entire day there.

Malls, though (again from The Destruction of Traditional Retail):

… took this model to the logical extreme by collecting together a large number of separate stores to create a shopping destination.

Ironically, many malls were often built around a department store playing the role of anchor tenant. The department store provided that critical mass of products that would convince shoppers to try their luck at the mall rather than head somewhere else.

If malls and department stores so similar then why is one succeeding while the other fails?

The first difference is the Gruen transfer.

The invention of the classic indoor mall is generally credited to Vienna-born architect Victor Gruen. Gruen first outlined his vision for malls in a 1952 article in the US magazine Progressive Architecture. Most Americans were moving out to suburbia but still shopping downtown. Gruen considered suburbia soulless and heartless. The mall, he thought, could remedy these problems by recreating the town marketplace or public square and providing the suburbs with a cultural focus.

Gruen’s malls were extremely effective both at luring customers and holding them captive. The later effect was named the Gruen Transfer, much to Gruen’s chagrin as it was one aspect of the his invention that he disavowed.

From the FAQ on The Gruen Transfer’s{{3}} web site{{4}}:

[[3]]The Gruen Transfer is also the name of a television program on Australia’s ABC1 network. The show discusses the methods, science and psychology behind advertising.[[3]]

[[4]] What does ‘The Gruen Transfer’ mean? from the The Gruen Transfer FAQ[[4]]

The Gruen Transfer refers to the moment when we as consumers unwittingly respond to cues in the shopping environment that are designed to disorientate. Factors such as the lighting, sounds, temperature and the spatial arrangements of stores and displays interact, leading the customer to lose control of their critical decision making processes. Our eyes glaze over, our jaws slacken, we forget what we came for and become impulse buyers. So if you go into a mall to buy a mop and walk out with a toaster, a block of cheese and a badminton set, then the Gruen Transfer has probably played a role. Or maybe you just really like cheese.

The second difference is in the portfolio nature of a mall.

A department store is a single business that operates a number of departments. While it might include a merry-go-round and large man in a red suit at Christmas, the focus is firmly on shifting product. The department store is a shopping destination: it’s somewhere you go when you have a need to be filled.

Malls, on the other hand, operates a portfolio of businesses. While the portfolio might include retailers (or, as has been the case to date, dominated by retailers) the focus of the mall is keeping punters in the mall and keeping them circulating. As along as the punters are circulating they’re spending money, and the mall will be taking their percentage.

The mall is less concerned with shifting product than keeping you at the mall bouncing between stores, as the more time you spend there the more money you’re likely to spend. Turn up for a movie, end up having a meal, get a foot massage and have your toenails painted, and you might even buy a pair of shoes.

Consumer behaviour, as I’ve said before, is changing though. We used to head out the door to find some product we needed: soap, some nails, or a suit for the wedding next weekend. Now we head out to be entertained: to see a movie, meet friends at the food court, or even just to hide from the heat in the mall’s air-conditioning (that foot massage sounds good too).

Department stores are contracting because we don’t head out the door on a shopping mission as much as we used to. Their addressable market – people who want to spend the afternoon wandering between racks of products while they pick up a few things they need (or even things they don’t need) – has shrunk.

Malls, though, are having no problem attracting punters.

Victor Gruen was right: we do need a place that we can gather as a community. What he got wrong is that we don’t want a market place or public square. What we’ve ended up with is a casino; somewhere exciting and entertaining where we can bounce between activities or even just catch up with friends in amongst the hustle and bustle. Malls have become the casinos of middle class suburbia.

The challenge malls have is to find the mix of business that provide us, the consumers, with the most engaging visit possible. Revenues might be down a little at the moment{{5}} but it’s not a long term trend (as with department stores), the malls are still full and there’s lots of possibilities to explore.

[[5]]Sarah Danckert (18 October 2013), Mall growth plans reined in, The Australian.[[5]]

Image source: Alpha.

What’s the future of the CIO?

I have a post up at CIO of the Future called ‘What’s the future of the CIO?’ which explores where the role of the CIO might go.

The post asks the question:

As IT leaders, do we want to continue to be chief infrastructure owners and order takers?

The established CIO role seems to be fading into the sunset, which is interesting as as technology has never been more central to a business’s ability to compete. One view that many senior business people seem to hold is that technology has become too important to leave in the hands of an infrastructure manager.

The shift from on-premesis solutions to cloud-based services is removing many of the traditional responsibilities of a CIO. At the same time the focus for enterprise technology has shifted from internal to external problems. Technology has been transformed from something we own to something we use. This transformation is breaking a lot of our assumptions on best practice and consigning many hard won skills to the dustbin.

In the post I talk about the journey many Chief Marketing Officers (CMOs) are going on, experimenting with new techniques and tools so that they can use social media as something more than than just a dog whistle. This is not a journey that the CIO can lead, as it is the CMOs of have the problem that needs solving. CIOs can, however, use this as an opportunity to carve out a new role for them and their departments.<

Few companies would consider doing without a CFO and finance department, as finance is central to resource management. Few companies will be able to do without a CIO and IT department, as IT is central to a company’s ability to engage the market and create new opportunities.

While the CIO role might appear to be in decline, this is also an opportunity for CIOs to get out of the back room, do something meaningful for the business and their customers, creating a much higher status role for themselves  in the process.

The CIO is the in-depth professional who can bring together the technologies and skills that the business needs to drive itself forward, to enable it to avoid problems, and to pounce on opportunities and adapt.

You can find the full article over at CIO of the Future.

We’ve launched CIO of the Future

I was recently offered the opportunity to add another string to my bow: editor of CIO of the Future, a new forum that was being put together by Ross Dawson and the team at Advanced Human Technologies.

CIO of the Future Screen Shot

Ross captured the intent of the forum nicely when he announced the launch:

The themes of the publication are actually centered not so much on the CIO per se, as on the leadership required to create value as technology moves to the center of work, business, and society.

This goes beyond the role of the CIO and encompasses other executive roles, and indeed the strategy and positioning of both private and public sector organizations.

I’m grateful for the chance to work with Ross and the AHT team on such an interesting topic at an important time. Come along and see what we have to say, leave a comment, and (if you’d like to add your voice to the conversation) we’d love to feature your contribution.

In retail you’re either a religion, a community hub, or a commodity

Being a successful retailer used to be a question of stocking the right products. Given that consumers all have their own preferences this usually devolved into trying to offer either the best or the cheapest, or products tailored to the unique needs of a specific market segment. Or, putting it another way, you could choose to sell expensive suits, cheap suits, or suits for the broad and tall.

Today – as globalisation, the internet and social media bite into retail – retailers have been working hard to build a compelling in-store experience. The theory is that by providing a pleasant and streamlined buying journey (or, at least, a more pleasant and streamlined journey than your local and online competitors) you’ll encourage consumers to shop at your store. This has driven the recent wave of investment in omni-channel, in-store WiFi and mobile apps.

The problem is that consumer behaviour is changing.1)The destruction of traditional retail @ PEG No longer do we identify a need and then head out to the store to find a product to fill it. Browsing is something we do in a spare moment, sitting in front of the TV with a tablet, or via a smartphone during our commute on the train. We purchase when we realise that we’ve found something we want or need, wherever we are at the time and via the channel that is the most convenient.

Building your business on the assumption that customers will come to your store looking for a product in no longer a viable strategy. It’s not enough to provide the best products or the cheapest. Nor is it enough to provide a more pleasant experience than the competition.

You need to find a way to draw customers to your store before they want to buy something. Retail must make itself part of the consumer’s identity, it needs to become one of their habits or rituals, rather than simply providing a convenient delivery mechanism for someone else’s products.

Three options seem to be emerging from he turbulent market we’re in at the moment.

  1. Make your business into a community hub
  2. Create a religion
  3. Resign yourself to being a commodity

Continue reading In retail you’re either a religion, a community hub, or a commodity

References   [ + ]

Has Apple made NFC irrelevant?

In The future of exchanging value{{1}} I, along with Peter Williams and Ian Harper at Deloitte, pointed out that a successful retail payments strategy should be founded on empowering consumers and merchants to transact when and where they want to. Investing in technologies such as near-field communication (NFC) networks might allow you to shave a couple of seconds off the transaction time once customer was at the till, but it ignores the fact that consumers are increasingly transacting away from the till as mobile phones and ubiquitous connectivity allow them to transact when and where they want to.

[[1]]Peter Evans-Greenwood, Ian Harper, Peter Williams (2012), The future of exchanging value, Deloitte[[1]]

We are seeing a shift from technology acquisition to technology use. Rather than building a payment strategy around the acquisition of a new technology (such as NFC), a successful strategy needs to be based on streamlining the buying journey. While NFC might enable the consumer to save a few seconds at the till, it does not address the far larger time they spent waiting in the queue beforehand. A more valuable solution might avoid the need to queue entirely. This is a design-led approach, focused on the overall problem the customer is solving and the context in which they are solving. Technologies are pulled into the payment strategy as needed, rather than building the strategy around the acquisition of an asset or capability.

Amazon used this approach with the development of the company’s mobile application, one that allows you snap an image of a barcode to purchase a product. Bricks-and-morter retailers see this as showrooming and unsportsmanlike. Many consumers, however, love the idea.

As I pointed out in The destruction of traditional retail{{2}}:

[[2]]The destruction of traditional retail @ PEG[[2]]

If you’re standing in an aisle casually browsing products then Amazon’s till is closer to you than the one at the front of the store[4]. You also don’t need to worry about carrying your purchase home.

The challenge for retailers (from The future of exchanging value) is to:

… manage a portfolio of technologies, from existing payment infrastructure through NFC to emerging tools, combining them to enable customers to transact when and how they need to.

The way for bricks-and-morter retailers to fight showrooming is use a range of low-cost consumer technologies to make it more convenient to transact with them than an internet retailer.

Apple showed how this might be done during the What’s New in Core Location presentation at the company’s recent Worldwide Developers Conference.

Imagine you walk into Jay’s Donut Shop. iBeacons from Core Location are accurate enough for the retailer to be sure that you have walked in, while other location technologies (such as GPS or those based on Wi-Fi) could, at best, provide a list of guesses. You don’t even need to check in. You could order you donuts before you entered the shop. When you reach the counter your iPhone would display a QR code that a clerk uses to verify the purchase. You grab your donuts and leave, the transaction charged to your iTunes account and your receipt already on your phone.

As Mike Elgan points out in his post Why Apple’s ‘indoor GPS’ plan is brilliant{{3}}, it’s not much of stretch to consider some much more interesting scenarios.

[[3]]Mike Elgan (14th September 2013), Why Apple’s ‘indoor GPS’ plan is brilliant, Computer World.[[3]]

A customer could scan the labels on clothing, process the transaction on the phone, then stroll out of the store with purchases in hand (the alarm would be de-activated for those items).

This is a solution that could be supported tomorrow on all iPhone 4Ss through to the new iPhone 5C. The hardware required to create an iBeacon is already available and it’s cheap, often in the 10s of US$.

NFC continues to struggle and it seems that Apple might have pulled together a solution that makes it irrelevent.

Winners and losers in retail

There’s a lot of talk in the media at the moment about the soft retail market. Consumer confidence is down1)Australian Consumer ConfidenceTrading Economics and we (as we’re all consumers) are not spending like we used to, or at least we’re not spending like the retailers would like us to, and that when we do spend that we’re running to cheaper online retailers. I’m not sure that this is the whole story though.

With a spare Sunday afternoon on my hands I decided to spend some time trawling through the ABS retail data and take a look beyond the month-on-month trends. Working on an Australian version of the Shift Index2)The Shift Index: Measuring the forces of long term change, Deloitte has nudged me to wonder about the long term trends that are affecting retail.

Continue reading Winners and losers in retail

References   [ + ]