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Wednesday, April 18, 2012

The Science of Retail

#orgintelligence Liz McShane of @PortlandDesign tells @pollycurtis why Tesco's star has waned.

"Tesco has taken its eye off the ball for some time now, focusing more on the science of retail rather than the emotion of it. By that we mean the prioritisation of the loyalty card programme and harvesting customer data, which has lead to the fundamentals of good service being neglected, for example the first thing you are asked at the check-out is for your loyalty card, rather than a simple (but appreciated) hello. ... Reliance on discounts as a point of differentiation has in turn neglected the in-store experience."
Polly Curtis, Why are we falling out of love with Tesco? Guardian, 18 April 2012

In the past, I have praised Tesco for its mastery of the science of retail, and this is certainly one aspect of its organizational intelligence. This included the following elements.

  • The Loyalty Card innovation led to the creation of a new data class called Customer. (Retailers previously had no way of recognizing a customer as "the same again" - which is a fundamental requirement for a data class).
  • The collection and analysis of very large quantities of customer purchasing behaviour.
  • The planning and execution of very large numbers of pricing and marketing experiments, such as special offers.
  • Optimizing prices and promotions based on feedback.
In the old days, retailers ran special offers for a number of reasons.
  • To shift surplus inventory (either their own or further up the supply chain)
  • As loss leaders, to get customers into the store.
  • To attack other retailers.
All of these reasons are still valid, but we can now add a further reason.
  • To differentiate customer behaviour - e.g. testing the elasticity of demand for different products for different customer segments.

Many companies collect large quantities of data, but few companies seemed to be able to use the data as effectively and profitably as Tesco. Clearly this is not just about the IT systems but about integrating sophisticated management information and analytics into the business process. This is a big part of my Organizational Intelligence story.

And as Alan Mitchell explains, Tesco's Clubcard has benefited from a unique combination of favourable attributes, which other retailers cannot duplicate. Luck or intelligence?

But this must now be balanced against Tesco's neglect of other success factors, which several of Polly Curtis's correspondents have identified. It now becomes clear that Tesco was failing to respond to a number of other weak signals, and has fallen behind its competitors in some areas. Responding appropriately to weak signals is another key part of the Organizational Intelligence story.

Liz McShane seems to imply that Tesco's success in one area (loyalty card programme, data harvesting and differentiation) was a cause of its neglect of other success factors. What could explain this neglect? So perhaps Tesco only has a finite amount of organizational intelligence, and deploying it in one area means that it is not available in other areas. Or perhaps Tesco's success in one area made it complacent in other areas.

But instead of just attributing the shift in fortunes solely to neglect on Tesco's part, we could also explain it by changing circumstances, which even a good company might be unable to anticipate. So perhaps customers might be starting to become aware/wary of Tesco's cleverness - thanks in part to media coverage, as well as such anecdotes as pregnant women receiving targeted marketing before anyone else knew. This would either mean that this form of intelligence has diminishing returns, or that it requires continual leaps in intelligence to keep one step ahead of customer resistance.

Some commentators have seen the recent change of CEO as a proximate cause for Tesco's latest results, but I doubt that it will have made much difference, not yet at least. For many years, Sir Terry Leahy was one of the most respected CEOs in the UK; but then so (for a time) was Sir Fred Goodwin. We shouldn't confuse public reputation with real effectiveness, and we shouldn't be in any haste to assess the true contribution of any individual to a large company. In any case, the personality of the CEO may only have a marginal effect on organizational intelligence of the whole enterprise.

Nevertheless, in his Wikipedia entry, Sir Terry Leahy is credited with devising and implementing the Tesco Clubcard loyalty program "and also successfully monitoring the shopping habits, movements, and political opinions of Clubcard holders". Leahy only stood down as CEO in March 2011, so it is a bit unfair to blame his successor if it turns out that the overwhelming success of Clubcard programme has masked under-investment in other areas.

Some commentators have also noted that Leahy's successor, Philip Clarke, had been CIO of Tesco, although he did not have an IT background.

After graduating from Liverpool University with a degree in economics he joined the Tesco Management Training Programme which provided him with a perfect platform to work his way to the top. In 1998 he was appointed to the board with responsibility for the supply chain and a year later information technology was added to his brief. ... Six years into the role, Mr Clarke then became responsible for the businesses outside the UK, leading Tesco's entry into the huge markets of India and China.
http://www.bbc.co.uk/news/business-13114113

My interpretation of this series of appointments is that the Tesco board (including Leahy and Clarke) saw supply chain, IT and international as the strategic capabilities for Tesco, and this may be a good indicator of Tesco's present strengths and weaknesses.

It is however worth pointing out that Tesco's profits have only fallen by 1%. Although this may be an unwelcome surprise for Tesco shareholders and senior management (especially as the stock market generally overreacts to this kind of news), it hardly signals the end of the road for Tesco just yet.



Rachel Shabi, The card up their sleeve (Guardian, 19 July 2003)

Glynn Davies, How Tesco became Britain's top supermarket (MoneyWeek, 9 May 2007)

Alan Mitchell, Why Tesco Clubcard is a dead end (Marketing Magazine, 16 April 2010)

Philip Clarke, Retail is detail: Tesco boss Philip Clarke explains new retail strategy (BBC Today, 18 April 2012)


Subsequent link

Zoe Wood, Five problems for Tesco's new boss to deal with (Guardian, 21 July 2014)

2 comments:

  1. The key phrase IMHO is the phrase "weak signals". It's quite straightforward to see the strong ones, but the weak ones require a subtelty and understanding of human behavior that "scientific" approaches don't address.
    Sort of "Gut Feeling: (Gerd Gigerenzer) meets Big data analytics and "evidenced based" approaches. I would argue that weak signals tend to be gut based and strong signals come from the data.
    But of course this is a gut feeling.....

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  2. A lot of this seems to come down to the dichotomy between the science of behaviour, and the science of emotion. In one sense, could emotion be seen as "metabehaviour", or that which drives certain forms of behaviour?

    Understanding both 1) emotion and 2) behaviour at the levels of A) the individual and B) a group - this feels like a good way to structure some thoughts - and also highlights the complexity of a single system of customer measurement to extract value (I love that phrase) as much as possible.

    I guess Tesco apply a lot of Bayesian inference techniques - "customers who buy A and B will want to buy C", etc. Similarly, emotion can probably be inferred likewise, but with different factors - "if it's raining in winter, customers will feel X", or "if it's a bank holiday in a week, and it's 9am, customers will feel Y".

    Combining the two feels like a challenge - and any challenge requires experimentation, and failure. Capturing the range of emotion felt by customers, and channelling that into their buying preferences, becomes a multiplication operation. e.g. Customer A doesn't like rain in the afternoon and is more likely to buy product X. Customer B doesn't like rain either, but will buy product Y instead. Customer C doesn't actually care about rain at all, but just wants to get the kids to school.

    Maybe Tesco have reached a new Aleph with their Big Data?

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