Is Competitive Advantage Actually Dead?

Professor Rita Gunther McGrath makes the audacious claim Is Competitive Advantage Actually Dead? in here book (The End of Competitive Advantage: How to Keep Your Strategy Moving as Fast as Your Business ) published in 2013.  I’m not sold that she proved her point.

At the outset, McGrath is quick to emphasize that the pace of play in the economy has increased at an exponential pace.  This higher ‘clock rate’ means that companies and businesses come in and out of existence at a much higher pace.  As such, she wants to prove that Michael Porter’s 5 Forces and other models of strategic analysis become increasingly impotent in driving corporate decision making.

The point she makes is that strategy is much more like surfing – and that companies need to think about riding a given wave and then changing.  To do that well, requires a nimble organization that can chase opportunities in a flexible fashion.

Where McGrath goes wrong is that she tries to make this argument by pulling together a set of companies that she believe demonstrate this, kind of Jim Collins, Good to Great style.  Her criteria were company that managed to grow over the 10 year period from 2000-2009.  No specification was made regarding organic vs. inorganic growth – or even took into consideration the financial crises that existed during that point in time.

The rest of the 200 page work reads more like a Harvard Business Review article run long.  Her key points are that companies need to manage capital expenditures and resource allocation decision centrally and not at a business unit level.  With senior management driving capex, there is greater opportunity to see obsolescence risk in an existing line of business, as well as make sure that innovation initiatives do not get starved for capital.

Two other interesting ideas she lays out:

  • Technology debt – once you have invested in a technological system, the requirement to continue to upgrade and improve on it, means that the capital requirements behave a lot more like a loan / interest payment.
  • Access to assets is now more important than ownership.  If you may not be in a business for a long-duration, scaling quickly via rental may be more powerful than owning your own capital goods.

 

 

We Deserve Better Than Today’s Department Stores

We have all seen the advertisements like the below from Macy’s, and I know I cannot be the only one who wants to scream at the TV when I read it.  “One Day Sale” with a “Preview Day” the day before it.  If there is a ‘Preview Day’ of the same sale, then it is not a 1 day sale!

Capture-72

All that this advertising demonstrates is that the American department store, and most of the American retail landscape, has literally lost all levers to drive their business other than price.  See for example the chart below from J.C. Penney:


dptstoreprices


 

What JCP shows is that while the retail price has risen by over 40% since 2002 – the average selling price after discounts, is actually down modestly.  What the retailers are doing is raising prices, so they can mark them down with even larger discounts.

The problem is that the product is unchanged.  If I take a crappy $10 t-shirt and raise the price from $20 retail to $30 retail, and sell it for $15 after a coupon.  Regardless of whether it is sold for 25% off or 50% off, it is still the same crappy t-shirt.

Here’s the conundrum – the consumer has gotten so used to buying at 50% off or more, if the price isn’t marked down, she has no way of knowing whether or not she got a good deal.   More over, in a middle class that has not seen an effective pay rise in 30 years, our prototypical shopper needs to be able to demonstrate savings as a way  of proving value to the family.

The question, and hence our title, is does it have to be this way?  

Ron Johnson, the ill-fated CEO of J.C. Penney did not think so.  He thought that great merchandise at a good price would sell.  The problem is, he tried to create this environment on what looks to be a permanently tarnished brand.

Below, I would like to walk through some thoughts about why department stores do not have to suck structurally.  In fact, I would argue that there are many  things occurring in the consumer world, that would be supportive of department stores.

First, let’s look back at a little history.  Throughout time, department stores have used novelty as a way to drive customer traffic.  Department stores were often the first major places to install air conditioning, have a lunch counter, have Santa at Christmas, etc.

I’d highly commend the following lecture from the McCombs School of Business at the University of Texas called Ringing Registers – A History of America Retail.


[youtube https://www.youtube.com/watch?v=XyC2GkzKTeM&w=560&h=315]

 


The retail business model is contingent on two primary cost factors – space and labor.  Retailers must arrange their product assortments with items that turnover (sell through quickly) and carry enough of a profit margin to pay the staff and cover the rent.

Department stores are unique in my view in that they function as almost ‘bulk buyers’ of space in malls and other retail centers.   For example, J.C. Penney has many owned company stores that have incredibly costs per square foots, single digits in some cases.

What matters if department store has a modest cost advantage in the space requirement, is how can you create a product assortment the drives traffic and turnover?

Department stores have done this for the last 20 years or so by sourcing product directly (which bypasses the supplier margin) which allows them to sell the goods at crazy, advertised mark downs.   The net result are ‘value-brands’ like Arizona at JCP or Alfani at Macy’s.

The problem with this model is that you are carrying the cost of operating in a mall, the design/sourcing talent, and selling staff.  This model is inherently more expensive vs. a TJ Maxx for example which has cheap store locations and essentially minimal staff.

The way out of this quagmire is through a sea-change that is occurring in the consumer world.

The graphic below if my favorite representation of the current consumer landscape.


original


 

As you can see, in the branded food world, there are 10 or few companies that own almost the entirety of the ‘central core’ of a grocery store.  The reality, is that for most consumer product categories, there is a similar dynamic at play.  Large players have either swallowed whole new upstarts, or pushed them out of distribution.

There is a foundational shift that is occurring in the branded consumer products world currently.  After years and years of consolidation, we are seeing a new round of entrants for the first time in decades.

Through innovative new platforms like Kickstarter, etc. – it is easier than ever to launch a branded consumer product.  In many cases, companies are able to pre-sell their first round of inventory – removing much of the day 1 working capital costs required to build inventory.  This is occurring across categories, from beer to denim.

As a consumer, these new entrants are reintroducing brand differentiation to many categories for the first time in decades.

For the big consolidated players, this creates headwinds as the new entrances peel off small parts of market share.  Because of their low, predominately fixed cost base, tiny pieces of market-share more than satisfy their profit requirements.  As increased fragmentation occurs to the smaller players, each new entrant is able to differentiate itself on new value criteria that were not possible at scale.

So for example in the denim world, you have a number of new entrants that are just focusing on Cone Mills selvedge denim – a specific manner of weaving done by Cone Mills – a textile factory outside of Greensboro, NC.   Others are focusing on production of only Japanese limited edition fabrics.  Still others make only in the US, etc. etc.

The challenge facing these new companies is distribution.  If they have all the fixed costs of producing the product, they need to get in front of customers and sold quickly.  Obviously they can get distribution through the web / e-commerce.  But the pain point online is product discovery.  How do you find out about XYZ great new product or brand?  At this point, there has not been a great product discovery platform debuted.  Pinterest, potentially could be, but that remains to be determined.

There is an opportunity for department stores here.  With their bulk purchasing of space, they have the real estate flexibility to offer new brands a physical store front.  Many new companies simply don’t have enough different items to fill a standard mall spot.  But within a department store, they can easily carve out footage as small as a couple hundred square feet.

These new entrants solve a problem for the department store as well -Macy’s, Penney’s, etc. need novelty and differentiation to drive traffic.  Small brands have the novelty and specialization, but need the foot traffic to really grow.

A preview of this potential business model, you can see in a novel way at places like White’s Mercantile in Nashville.  This is a reinvention of the general mercantile store, but with unique products.  From our history of retail, we know that the general merchandise store ultimately paved the way for department stores and other larger concepts.

Time will tell if a larger retailer, and / or a new retailer, is able to merge these two concepts together at scale.

Ten Lessons I’ve Learned from Being an Entrepreneur

10 lessons I’ve learned after ~4 years as an entrepreneur

  1. It will take twice as long to get where you want to be – no matter how prepared you are, it will take longer than you think
  2. The hardest time in the startup is at the “growth plateau” – 7-12 months after you’ve started, the initial momentum will have waned, but the new initiatives won’t have taken root as quickly as you have liked
  3. Having a good partner and working on your partnership is as important – learn how other person communicates, be willing to have tough conversations, be willing to move first if something needs addressing
  4. Cost management is key – Minimize the nonessentials, and spend the big $ on the folks that allow you to do your job better
  5. Do not forget to work “on your business,” not just “for your business” – think about processes/standardization, etc. – Read the E-Myth for more info
  6. Have a healthy outlet for stress – work-out, walk, etc. or you can become unbearable to live with
  7. In addition to your partner, having a close friend who has done / is doing a start-up is invaluable – they can empathize with the struggles, but are not so close to the situation
  8. “The road to success is paved with mistakes well handled” – Stanley Marcus of Neiman Marcus
  9. Don’t be afraid to ask / everything is negotiable
  10. Celebrate the small wins / enjoy the journey – you can get too focused on the 1,2,5, and 10 year plans that you forget to enjoy where you are.