In search of speed: A new way for retailers to organize

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The retail sector has reached a fork in the road: stay traditional, or go digital. The sector has been heading toward this fork for a decade, and its journey has only been accelerated by the COVID-19 pandemic. During the crisis, customers’ expectations and behaviors have changed the retail landscape: traditional competitive advantages are eroding, channel preferences are evolving, and technological sophistication has become a basic requirement.

Many incumbent retailers are poorly prepared to deal with these disruptions, leading to a devastating impact on the industry. In the United States alone, more than 100 retailers have declared bankruptcy in the past three years, and about 30,000 stores closed in the same period. Retailers are in the uncomfortable position of witnessing a rate of external change that they cannot match internally. Their traditional systems, talent management, and decision speed have become seemingly insurmountable barriers to change.

We believe that retailers can rejuvenate their outdated operating models by undertaking enterprise-agility transformations. In a previously published article, we set out the characteristics and principles of agile working practices in strategy, structure, people, processes, and technology. In this article, we explore how agile working practices in these five areas express themselves in the evolving retail sector.

What’s changing in retail

Three trends are manifesting themselves in the retail industry today,1 and organizations must address them to stay relevant.

The competitive advantages of traditional retail are not enough

Great brands, quality footprints, and streamlined operations are important assets in traditional environments, but they will not be enough for retailers competing in the new market environment. In a data-empowered digital world in which solving customers’ problems has become the key success factor, the traditional model for retail supply-chain excellence has to evolve, and retailers must find ways to offer customer convenience across all touchpoints.

Channels and customer expectations and behaviors are shifting

Forty-six percent of US consumers have switched brands or retailers recently. New digital channels and e-commerce activities have surged during the pandemic, and their popularity will likely endure. For example, we observed ten years’ worth of growth in US e-commerce penetration during the first 90 days of the COVID-19 pandemic. New entrants with the best digital offers and those retailers that provide an integrated customer experience are capturing the majority of growth, putting pressure on incumbent retailers in terms of profitability and customer service (see sidebar, “Moving toward integrated retailing”).

Technology advancements are needed

Tools that were once great add-ons, such as mobile payments and apps, have become table stakes in the era of omnichannel retail. Now they are prominent factors in how customers choose to make purchases. The pace of technology advancement, the development of new ways of interacting with customers, and the rate of customer-driven demands will continue to accelerate, forcing retailers to constantly adapt. New frontiers of technology, such as the Internet of Things, artificial intelligence, augmented reality, and new social platforms for customers, will force retailers to react based on how customers use and interact with them. Under these circumstances, retailers must have an adaptive technology backbone in place.

The search for a new model

Some retailers are anticipating these market trends and have realized that they need to adjust their operations to increase adaptability and speed. The Warehouse Group, one of the largest retail groups in New Zealand, recently completed an enterprise-agility transformation, moving its support office to agile ways of working.

The future is moving so fast that we can no longer anticipate it with any certainty; the only immutable [fact] that we can rely on is an ever-increasing pace of change. Historical command-and-control mechanisms simply do not permit us to operate fast enough, to become changeable and nimble, and to have ‘speed as a habit.’ To make this work, we need to empower cross-functional teams to operate autonomously at the edge closest to the customer.

Nick Grayston, CEO, The Warehouse Group

McKinsey analysis of how retailers accelerated the move to agile during the pandemic found that key elements in success included focusing on a smaller set of better-defined priorities, emphasizing customer centricity, forming small mission-based teams, and pushing for faster decision making and mindset changes.

Agile organizations are markedly different from their traditional counterparts in five ways. First, strategy is embodied in the whole organization and represents its “North Star.” Second, agile organizations are structured as networks of empowered teams. Third, their processes involve rapid decision and learning cycles. Fourth, they use a dynamic people model designed to ignite passion and to delegate authority. Fifth, they employ next-generation technology and are agnostic about legacy systems.

How can retailers embrace an agile approach? Several important actions are required in each of the following five areas.

Strategy: Less focus on category and more focus on customer and ‘share of wallet’

As growth becomes harder to capture through traditional channels and inducements, retailers should look more closely at their customer data to identify opportunities to increase “share of wallet.” This shift requires not only finding and using more customer insights but also building more holistic and customer-focused perspectives.

Innovative retailers are forming teams to improve customer journeys. They compile the resources that are required to deliver an omnichannel experience throughout the customer journey, mixing stores, operations, and digital capabilities with customer insights and analytics, user-experience data, and front- and back-end development. For example, The Warehouse Group created a “tribe” comprising a loyalty team, an e-commerce platform team, and an app team to focus on improving customer engagement by looking at all engagement assets together, as well as to update store design and “feel.” With this tribe strategy, the teams found they could provide a more omnichannel experience.

Structure: Fewer silos and stronger connections among functions

Retailers typically organize their teams by function, such as by merchandising and operations. Those functions operate as separate units and sometimes suffer from misaligned incentives. This segmentation, in turn, can cause slower implementation and unnecessary waste because of too many hand-offs.

Agile retailers have evolved their structures to create teams that are accountable for delivering certain customer outcomes from end to end, which involves mixing resources that traditionally would sit in different functions (exhibit). A Latin American retailer redesigned its category-management teams to hold more extensive responsibilities along the value chain by combining buying, assortment, merchandizing, logistics, private-label, and customer-insights capabilities into one team.

Cross-functional teams can be implemented across an organization.

Process: Fewer priorities and more flexibility to react rapidly to changing needs

The traditional yearly budget cycle is not agile enough to capture market opportunities, and basing resource allocation on previous periods leads to incremental improvements. As a result, traditional retailers struggle to make swift changes.

Agile retailers set priorities and reallocate resources through a process called quarterly business review (QBR). The Warehouse Group found that its declining customer-satisfaction scores were caused by poor fulfillment, especially in the company’s click-and-collect service. Through its QBR process, it quickly reallocated resources to create three teams—comprising business, technology, and data specialists—dedicated to improving click-and-collect and delivery services. These dedicated teams helped The Warehouse Group deliver a 30 percent increase in its overall click-and-collect customer-satisfaction score in less than six months.

People: Less traditional talent mix and more next-generation, high-potential, diverse talent

The retail sector is struggling to attract a new generation of talent. In an industry-wide study conducted in 2017, retail was identified as the fastest-declining sector among millennials as measured by talent attraction.2

It’s essential that retailers reverse this trend. Frontline retail employees can assist customers in bridging digital and physical channels, which would help create a seamless omnichannel experience and could play a key role in increasing customer usage of digital functionalities. Most agile transformations emphasize customer centricity and improved customer experience, so frontline employees—the workers who have a direct and daily influence on shoppers—must be an integral part of the process. Therefore, finding and nurturing talent is crucial.

Incumbent organizations moving to enterprise agility have seen a marked increase in employee engagement and in their ability to attract talent. For example, one Australian retailer increased employee satisfaction by 15 percentage points less than six months after completing its transformation. To create new company cultures, organizations engaged in enterprise-agility transformations have changed their working environments, empowered teams and individuals by giving them the authority to make decisions, redefined organizational and team purposes, and provided broader varieties of career options. As organizations adopt enterprise agility, many improve their standing in rankings of the best places to work.

Technology: Less technology as a service and more digital technology as part of the core business

Customers are demanding a seamless shopping experience, which requires smooth transitions between channels. To meet this demand, incumbent retailers must reinvent their operations and rapidly create and stabilize any new channels, services, and experience tools. Digital and technology must become central to the business to enable this reinvention.

Agile retailers have tended to adjust their IT and digital operating models to suit new technologies, allowing support resources such as engineers and architects to become part of their business teams. The Warehouse Group created a customer-engagement tribe that focused on providing the right experience to customers across different brands and categories. In this new tribe, everyone working on newly developed apps, loyalty programs, web platforms, and store design and “feel” typically sat together and worked toward shared objectives.

We have seen a significant increase in the number of organizations that are moving to enterprise agility. Our research shows that 44 percent of all organizations have started moving their entire business, or a significant part of it, to enterprise agility. Retail is in the vanguard, with 55 percent of surveyed retailers in this category. This should not come as a surprise: several retail leaders have been employing agile principles for some time.

An agile enterprise will be faster, more responsive, more focused on performance, and better able to attract talent than a traditional retailer. The good news is that traditional retailers that have not yet transformed still have the opportunity to surpass even digital native retailers. The pressing question for retailers is, “If not now, when?”

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