Amazon made a huge change in Retail and all the large retail chains feel it. The ability to buy online is a disrupting technology, even if it won’t totally shut down the retail chains The question is how the way current retail stores are going to change in order stay economically viable. Regular stores will have to emphasis their added-value to the products and customers for which digital stores have difficulty to satisfy. It is similar to the small shops that succeed to exist along the big stores, because they offer personal service and specific taste that appeal to certain segments.
The focus here is on the general concept of a digital store, which offers wide variety of products through the Internet and ships the purchased items to the client. It does not deal with the need of a specific store to differentiate itself from the other stores.
Question 1: What is the power of the new technology/product/service?
Digital stores have the technology and the logistical capabilities to show variety of items for sale through the Internet, accept orders, accept secure payments and ship the purchased items to the client address.
Question 2: What current limitation or barrier does the new technology eliminate or vastly reduce?
The limitation, removed by the digital stores, is the need to go to a store to choose and pay for the items. Within the limitation there are three different sub-limitations:
- Reaching the physical store. It takes time, efforts and money.
- Facing limited choice, depending on the space of the store and how it is utilized, thus having lower chance to find the item of choice.
- Limited capability to compare prices. In the store the buyer is faced with the price of that store. Even when the buyer is aware of another store with reduced price it still requires going to that store adding more time and efforts.
Amazon started by offering, to the whole world, a wide-range choice of books and CDs that no physical store is able to keep, this is on top of the ability to buy without going out of home.
The limitation eliminated or reduced by the new technology let us analyze the target market for which the new added-value is very high.
Reaching a physical store can be viewed as a burden, but it can be desirable in itself. The term ‘shopping’ suggests that there is substantial value, for many people, in having good time by going to a store and browsing through the displayed choice. For these potential customers the limitation is much smaller: only when there is no time, or capability, to go to a store, then there is added-value to the digital store. For customers who “hate shopping” or customers who are ultra busy at work, the option of buying from home, maybe during the night, is a blessing.
For customers who live far from the worthy stores the value of buying online is most valuable. So, customers in rural areas are a good target. Customers in big cities, but without a car and far away from the big shopping centers, are a reasonable target as well.
Customers who love to find the cheapest priced items, digital stores offer an advantage, because it is so easy to compare prices and find the cheapest store for a specific product.
It seems to me that second question, as verbalized by Goldratt, lacks a critical part:
What new limitation(s) are imposed by the new technology?
In other words, what are the key current negative branches (NBR) created by the new technology? Some of the new limitations might be eliminated in the foreseen future. Others do not currently seem to be solvable, so they reduce the value. It is of special importance to check the new limitations regarding the segment that draws the key value from the removing the old limitation.
The new possible limitations:
- The display on computer screens is not equivalent to the feeling of looking closely at the product and touching it. What might look esthetically nice in the picture might be much less attractive in reality.
- Returning the goods is always a hassle. When frequent bad quality or a mismatch between the buyer expectations and the product happen the hassle is combined with disappointment.
- It takes time, sometimes long time, until the product is received. It is always possible that the purchased item would not arrive at all.
- While there is an expectation that the price at the digital store is lower than in a store, the additional cost of shipping might increase the overall price beyond the price at the store.
- The huge available choice in various digital stores could be a curse rather than blessing. Searching for the best product might take very long time. Too much choice is often paralyzing, causing the buyer not to buy, and add the distress of wasting time.
- Lack of any human interaction reduces the confidence and pleasure of purchasing.
The key limitation that is eliminated or vastly reduced by the digital stores defines the customers, and the appropriate products and other conditions that would yield high value to those customers. The limitations of the solution add more conditions that reduce the original market segment, unless those limitations would be successfully eliminated.
However, in order to fully materialize the potential value of overcoming the need to reach a store we need to evaluate more questions.
Question 3: What are the current usage rules, patterns and behaviors that bypass the limitation?
This is a key question because it is not commonly asked. Identifying a limitation contains important knowledge about the potential value of eliminating it, but the true reference of the added-value is to compare the new situation with the situation prior to the new technology, considering the fact that people find ways to deal with the limitation by reducing its negative impact.
The way customers handle the need to reach a store is to batch many of their needs into the same trip to the shopping center, a mall, or a very large store. The emergence of large stores, containing diverse variety of departments, greatly supports the idea of batching. Having a group of stores, each one offering special sales and reduced prices, helps buyers feel that their time and efforts are well spend. The malls provide ample parking and also restaurants and coffee houses to make the shopping time and efforts pleasant and even rewarding.
The digital stores need to look at the malls as the reference for the current buying norms. The batching of buying many different things at the same time creates habits that impact the buyer facing the digital stores.
Question 4: What rules, patterns and behaviors need to be changed to get the benefits of the new technology?
What does it mean to draw the full benefits of digital stores?
Certainly a basic expertise of operating the computer is required, along with good internet connection. All safety issues have to be properly handled by the digital store and spread the recognition that buying online is safe. The change in the behavior means the customer has to be knowledgeable enough in searching the Internet and especially the new safety rules, like when it is safe to reveal the credit card details.
The habit of batching should be grossly reduced for buying online, with the exception of buying items from the same category, like groceries. The only slight advantage is the option of batching the shipment, but that is available only when the digital store carries all the items at its own warehouse.
Another example where buying several items at the same time online makes sense: when browsing through the special sales offered by a specific digital store. This is especially important for people who love bargains and “real finds.”
The practical meaning is that in the majority of the cases there is no added value to batch the purchases from a digital store.
Considering that most customers have free time and they like to go out of home or work clarifies that for the majority of the customers digital stores do not fully replace the retail chains, but they add superior ability to buy specific items easily without going out of home. So, the change in behavior is to make the differentiation what to buy online and what to buy by physically going to a store. So, awareness to when there is an advantage in searching the internet and how this should change our buying habits is truly required. It is the interest of both the digital stores and the physical stores to lead the potential customers to recognize their unique added-value and guide them to accomplish it.
The way people choose the store itself is also a habit to be re-considered. Going through many digital stores is time consuming and saving time is supposed to be the key value. One important factor is the brand name and the past experience in that store, physical or digital. The esthetics of the physical store has an additional and significant impact, but the factors that create impression from a digital store are quite different. Digital stores have to find the key factor that influences the right customers to go frequently into the store.
Attracting first-timers and then keeping them as frequent customers is a challenge for every digital store. It requires leading the customers into a unique and focused experience of looking at what they truly like; skipping most items the customer is not interested at.
Here are some characteristics for reasonable items to buy at digital stores:
- Items that are clearly defined by the picture and written description. In other words, the customer knows what he is buying.
- Items that are not commonly available in regular local stores.
- Items that are relatively expensive and digital stores are able to offer a very good price, including shipping.
- Heavy items that need to be shipped to the customer anyway.
Question 5: What is the application of the new technology that will enable the above change without causing resistance?
There are four critical factors that generate resistance to digital stores:
- Safety/security issues.
- Getting the products according to the expectations of the buyer.
- Being certain that the credit-card details would not be used for other purposes, not by the digital store and not by hackers fishing for such information.
- The private data of the buyer would not be sold to someone else and would not breach the privacy of the buyer.
- Efficient and friendly navigation, closing the deal and payment.
- The application has to give the feeling of saving time and hassle.
- The choice of items to be shown first is critical.
- The application has to give the feeling of saving time and hassle.
- Proper description of the product. The use has to be certain the chosen product is what he/she likes.
- On time and quality of the shipping process.
The current digital stores are still struggling with the above factors. While the confidence in the use of credit-cards in the Internet is getting reasonable answers, all the other issues are still open. The difficulty to describe the features and look of the items and what are the differences between seemingly similar items is especially troubling. Shipping is another open issue; with some new means of using drones to bring the item to its destination in the fastest and most friendly way.
Question 6: How to build, capitalize and sustain the business?
Every store, digital or physical, needs to re-think their strategy. The important starting point is identifying unique value to well-defined customers who need that value and do not get it anywhere else. The questions so far have outlined the overall contribution of the new technology, thus pointing to various market segments and what are the key challenges. What is required now are focused efforts to define the more specific value offered by the store to well-defined target market. This is what TOC calls a ‘decisive-competitive-edge’.
Once a decisive-competitive-edge idea is raised an analysis based on the six questions, but narrowed down to the specifics of the need and the proposed way to handle it would reveal the business opportunity.
Eventually developing the Strategy should lead to answers to the following critical questions:
- What should the store sell? What related services need to accompany the sale? At what price? To whom?
- How to operate the delivery in a way that would maximize the value to the target group of customers?
- How to market the unique value? How to prevent too many competitors to copy the unique value?
- How to answer all the concerns and reservations of the customers?
Digital stores are an example to a global change that all the players should analyze carefully in order to adjust to it in a faster and better way. The six questions are a good tool to guide such a necessary process.
7 thoughts on “Applying the six questions of technology to digital stores”
An excellent analysis of eCommerce! I would also add that several online digital stores are actually not stores at all. Amazon, eBay, AliExpress – these are all marketplaces. For example Amazon allows any company who want to sell their product to use the reputation of Amazon.com to try and attract buyers who are already browsing the store. They have several options for this, one where the manufacturer ships the order himself, and another where Amazon warehouses will receive a container of product from the manufacturer and distribute it using their own logistical system. It is quite a marvel that such an option exists, as it completely changes the barrier of entry for very small manufacturers into selling their products.
Another aspect is generating leads, incoming traffic for these websites is not so easy to come by. While some people will just visit the website looking for something specific, other people are looking for these products around the internet as a whole – and advertising, both direct by Amazon and indirect by allowing affiliates, is a very important aspect of these shops. For example Amazon offers up to 15% comission to affiliate marketers who bring customers who simply follow a link and buy some product. While different products have different comissions, Amazon does not bother with what customer buys in the end – they will pay comission to whoever brought them into the store. This again allows almost anyone with a bit of technical sense to create a website, a blog, or some other digital creation and capitalize on it by mentioning products which are available on Amazon and sending people to buy them there.
Full blown marketplaces like eBay and AliExpress are even more remarkable, in that they allow anyone, anywhere in the world – to sell anything to anyone else in the world. Including products that would not normally be found in any shops. And sellers in China even enjoy mostly free shipping for small items via China Post to almost any location in the world. This completely disrupted local shops. In my family most of the small gadgets come from China directly via AliExpress or eBay, and some clothing comes from Next in the UK which also has an amazing online shop.
Eli, I think there’s something very important that digital stores offer and it is the reviews. In my personal case, one of the big benefits is to be able to read reviews from people who have bought the item. I usually read the bad ones to see what they have to say and I look at the average customer review. Getting this unbiased opinions, and also asking questions is a huge benefit which is not found at the actual stores where sales people will obviously be biased.
Alejandro and also Evgeny, you are right that there are ways to offer more value through the digital stores. I’m thinking of writing another post analyzing the situation from the perspective of one digital stores. Evgeny speaks about the digital market-place – giving new opportunities to various sellers. You raises the benefits of the reviews. It seems also here that there is an advantage to the size for both ideas.
Digital stores can do better if they identify what their customer need, but do not get it easily, not from the regular retail stores, and maybe not from their direct competitors.
Thank you both for expanding the scope for the digital stores.
Eli, I liked your article and the idea for a follow up article from the perspective of a single online competitor.
To me, selling online is more than disruptive. It is currently a destructive technology. As long as a true “decisive competitive edge” is not successfully deployed, managers will be tempted to utilize the lower cost structure of fewer buildings and employees as their edge. Of course, this is attractive to consumers.
But, to whom is the technology destructive? The answer is BOTH brick-and-mortar stores AND what you call digital-stores. Stores like Sears have been delivered a knockout punch and are down on the canvas for the count. Nobody expects them to rise again. Are Macy’s and others far behind? What people often miss is the demise of many on-line stores as well. The assumption they have is: only with great sales volume can “economies of scale” lead to profits. The result is aggressive marketing combined with low prices. It is so expensive per new customer gained that profitability en route to (eventual?) success is elusive.
A “poison pill” strategy is deployed here, except there is no known antidote or natural immunity. On-line stores that deploy a fast growth, low margin strategy tend to both grow sales and losses together. Such companies require funding. Each year 2000, 1989 (Japan), 1987 and 1929 saw a collapse of such funding and there is an imminent reckoning coming in China that will make Japan’s devaluation and the Great Depression in the US look mild.
When (not if) will investors flee these sales heavy, profits light companies? The relatively ‘blue chip’ Amazon is currently selling at 180 times their last year’s earnings and last year’s (2016) earnings were about equal to the sum of all the profits Amazon had previously earned, since its inception. Should this destructive technology leader be worth more than Berkshire Hathaway which sells almost twice as much and earns over 12 times Amazon’s profits? And, if not, who is going to fund the digital industry’s “poison pill” strategy in order to give fickle consumers the chance to continue buying cheap? Reckon the buying public will pay more?
Henry, I fully agree that without developing a decisive-competitive-edge only the very large digital-stores would survive. I think ALL businesses around the internet should quickly start to think how to sell true added-value for money, and then think hard what is the value that certain type of customers, a well-defined market segment, needs. As WE, the potential customers, get used to get value for nothing, and then we waste that value because we have too much of it until it truly does not add value anymore, WE also make the overall economic situation worse. The rules of the game are going to change – not necessarily to what is good to us, unless we change as well.
Digital stores have to find the unique value they can give, which is NOT just a cheap price. I like very much to collaborate on writing that article – with you Henry.
But, Sears and Macy’s need also to find their own unique value. They are far from being victims of the new technology. They have to go out of their own inertia. I think they could rise again, but this would be also a painful journey into their current policies and procedures., recognizing that what they thought is their decisive-competitive-edge is not valid anymore. Each one of them needs to find a new decisive-competitive-edge (DCE). The brick-and-mortar stores are not going to disappear, but those that stay would operate and think differently than what they do today.
I think that TOC, with the six questions as a powerful methodology to start with, and from that to define the key DCE and from that to the strategy-and-tactic-tree (S&T), which would probably also vastly improve operations and how to deal with uncertainty should be viewed as a solid way to re-invent the business.
I don’t believe the technology is necessarily destructive. It is when you fail to understand the necessary required changed.
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I agree completely and will be happy to work on the blog post with you!
Eli, you ADDED: What new limitation(s) are imposed by the new technology? I agree, and suggest another ADDITION: What new opportunities are enabled by the new technology?
Current problems, limitations, and undesirable effects are important to acknowledge, but so are future opportunities and brand new desirable effects. Buying online allows customers to find specialty craftspeople (and boutique manufacturers) with custom solutions. And in turn, those businesses can reach a global audience with their unique and specialized offerings. This online “long tail” phenomenon is a win-win opportunity for customers and craftspeople. What was impossible in the old paradigm, is easy in the new paradigm. And this paradigm shift is technology-enabled.