I had the chance to attend a user group meeting in San Francisco last week, conducted by Pivotlink. Pivotlink offers a marketing optimization solution in a software-as-a-service model. The company finds itself at a really interesting and exciting moment in time, as retailers seek to address the challenge of becoming more customer-centric by developing an ability to dynamically respond to consumer needs with offers and assortment, no matter where she is in her particular path-to-purchase. As one speaker, Responsys VP of Strategic Services Heather Blank, stated, the “new school of marketing ” for retailers is that companies are switching from a “customer-acquisition ” to a “relationship ” focus, as they seek to direct more of their marketing spend towards customers they already have. As Blank outlined, “relationship ” retailing means focusing less on the “1^st ” purchase, but more on developing “relationships ” with customers that result in the “3^rd, 4^th, and 5^th purchases. “

RSR has argued that the heart of the challenge is that the whole retail industry is in the throes of a “reset moment ” that was triggered by the massive consumer adoption of “smart ” mobile technologies. That in turn has driven not only consumers’ anytime/anywhere shopping behaviors, but also their eagerness to participate in a dialogue with communities of like-minded consumers and companies to find just the right solutions to their lifestyle needs. Another way to say this is that retailers are shifting to a relationship focus because consumers are demanding that they do so. As another speaker, Susan Reda, executive editor of Stores Magazine, said, “retail has become too transactional ” – consumers demand more.

“Reset moments “, or “transformations “, are rare, of course, and success demands innovation – something that retailers generally aren’t known for. They are far better at delivering incremental improvements to the bottom line through a relentless focus on cost reduction. Since Pivotlink seeks to enable companies to execute a new kind of marketing, it was appropriate that the keynote speaker for the meeting was Robert Wolcott, Ph.D., Executive Director of the Kellogg Innovation Network (KIN) and a Senior Lecturer of Entrepreneurship & Innovation at the Kellogg School of Management, Northwestern University. Wolcott talked about the retail industry’s challenge as in moving from a “castle ” modus operandi to a “ship ” one.

Meaning? Since the last “reset moment ” (which we at RSR contend happened in the late 1980’s with the adoption of barcode scanning in the stores – which in turn enabled the kinds of supply chain efficiencies that the some companies achieved to dominate the marketplace with their product-oriented strategies), retailers have focused mostly on structure and efficiency. And according to Wolcott, the problem resulting from a laser focus on efficiency is that “the more optimized we become at ‘doing this’, the harder it is to ‘do that’ “. And “that ” of course is a more customer-centric operating model.

Castles and Ships

Professor Wolcott equated the focus on incremental improvements to “fortification “, or building “castles ” to insulate against the competition. But innovation requires exploration ( “a ship “). That turns out to be a fun and useful comparison – you can’t discover new continents while sitting in a castle, after all. The problem with a “castle ” mentality in times of great change, according to Wolcott, is that “insulation can become isolation “.

To drive the point home, the speaker listed companies that at one time had become isolated and let their past successes breed failure: IBM, Hertz, GM, Kmart, Xerox, Kodak, Sears, AIG, Lehman, PanAm. Some of those companies couldn’t change even when it was abundantly clear that they had to. Others, such as IBM, “got on a ship ” to discover a new way of doing business. But the change process itself is challenging. According to Wolcott, it requires businesses to shift from what’s going on within a company’s direct field of view, to the periphery ( “what’s going on just outside of your direct field of view “).

RSR’s research has consistently shown that Retail Winners maintain an outward focus, particularly on customers, while Retail Laggards invariably look inward for improvements. Wolcott amplified that idea, saying that successful innovators are very good at “translating and adopting ” outside ideas for the company (Wolcott calls this “concept arbitrage “). But it’s not easy: the professor underlined that finding and adopting “new to us ” ideas requires different processes, different metrics, and often, different people. Wolcott pointed out that IBM’s turnaround leader, Lou Gerstner, came from RJR Nabisco – hardly a technology behemoth. But Gerstner understood that to turn the tech giant company around, he first had to get people to accept that IBM’s corporate culture and loyalty to traditional ways now threatened its very existence.

Searching the Periphery

Wolcott pointed out what he meant by “exploration ” by showing a video about UK retailer’s HomePlus virtual subway store in South Korea (to view the video, click on this link- http://www.youtube.com/watch?v=fGaVFRzTTP4). How did Tesco come up with the concept? They didn’t start out by asking employees to sit in a room and brainstorm possible market-building tactics but instead looked beyond the periphery of their stores and into the busy lives of Korean consumers.

And that’s the secret: although developing innovations isn’t easy, it starts by companies asking themselves a simple question, “what’s out there just beyond the periphery of our business? “, and then going out there to look. And, it takes time – something ROI-obsessed retailers often don’t afford the innovation to become “earnings-positive “. Wolcott pointed out that many now-famous brands that changed their markets didn’t deliver much in the way of new sales in the first few years: Aquafina, Gatorade, and Red Bull.

Typical reasons that innovations often fail are: using the same organizations/channels, having a part-time team, and not having an executive sponsor. Readers of RSR’s research will recognize these as familiar organizational inhibitors to change, almost regardless of the subject that we choose to study.