Chapter 5: Strategic Process

Question 1

Drivers of a higher rate of return (R)

Answer 1

More Sales:
Like for like growth
New growth
Franchise

higher Margin:
Buying Conditions
Margin mix
Loss / Shrinkage
Bonus / Supplier Contributions

lower Costs:
Labour costs
Interest
Fixed costs

Question 2

Although the retail target formula is easy to propose, optimizing it is extremely complicated in practice. It requires constant alertness to:

● changing consumer preferences

● Changing price sensitivity

● Changing efficiency opportunities

Answer 2

→ with the resulting need to adjust the product mix

→ the need to adjust the margin mix

→ the need to adjust the costs mix

Question 3

Two opposing forces (frictions) are constantly working.

Answer 3

• Short term vs. Long term:
  The contraction between the short term (tactics) and long term (strategy). In principle, this contradiction occurs in every company, but in retail it is more pronounced and a daily event. The sales mix that is optimal for profitability today may differ from the sales mix that is optimal for the long term. The same applies to the margin mix and the cost mix.
• External market position vs. internal efficiency:
  The average added value in the retail sector is low. This means that we constantly have to balance the revenue opportunities that arise in the market (external market position) with the costs involved in exploiting these revenue opportunities (internal efficiency).

Question 4

Long term & External =

Answer 4

Strategic Market Position
- Refers to the external market position for the long term.
- For the retail sector, this means developing concepts and retail formulas
- points of attention: environment, market development, target group, positioning, concept development
External market position  Concept development

Question 5

Long term & Internal =

Answer 5

Strategic Efficiency
- The internal structure. It often involves building up operational advantages over the competition: effectiveness, here, is more important than productivity.
- Points of attention: operational excellence, benchmarking, performance improvement, sales driven
Internal structure  process development

Question 6

Short term & External =

Answer 6

Tactical sales efforts
- This quadrant is less about strategic aspects of the approach to the market and more about tactical aspects: successful implementation.
- Points of attention: price reductions, push marketing, promotions
Short-term market position  successful implementation

Question 7

Short term & Internal =

Answer 7

Tactical Cost Reduction
- Relates to managing costs. More about increasing productivity than about increasing effectiveness: development ofproductivity. Ultimately has an impact on long-term performance.
- Points of attention: cost control, productivity improvement, stock reduction, staffreduction
Managing costs  development of productivity

Question 8

Price formation within the e-tail infrastructure will often be done in a completely different way from in the traditional retail structure.

In traditional retailing, it is done by

Answer 8

calculating storage factors: a mark-up percentage is applied to the purchase price of the items. From this mark-up all costs excluding the cost of goods sold are then deducted. This includes the labour costs, logistic costs, rent of the store… all these costs can be high. Also the storage factors are often significant.

Question 9

In a web shop environment, we should mention these factors:

Answer 9

1. The search structure of the website
2. The content of the search structure
3. Traffic
4. Delivery costs

Question 10

1) The search structure of the website:

Answer 10

How easy can visitors of the website find what they are looking for (search engine of the website). It requires constant attention because it is the most important factor to successful conversion on a website.

Conversion indicates that someone turns from a visitor into a buyer, in percentage. The cost benefits will be greater in the online environment than in the physical environment. However, conversion in the online environment often does not exceed 3% (1.5% on average).

Question 11

2) The content of the search structure:

Answer 11

the analogy for the stock clerks is keeping track of the content of the search structure. In a webshop, this will involve lower costs than in a real store. However, every customer searches differently. Reviews by other customers play an important role. Current stock levels in webshops is not simply entering the product once: the consumer expects extensive product descriptions (e.g. Alibaba has different product descriptions generated by AI).

In addition, customers are demanding faster deliveries and this requires up-to-date stock levels in the distribution centre. In the situation where physical and online are completely merging into an omnichannel situation, the importance of up-to-date stock levels becomes even more complex. All stock levels should be accessible at all times and in all places.

Question 12

3) Traffic:

Answer 12

in traditional retail, rent is paid for the location and the amount determined based on the envisaged traffic - the number of visitors a location will generate on average. The better the location, the more traffic it will enjoy and the higher the rent per square metre will be.

The webshop is often the same. Here too, traffic is kind. The more traffic, the greater opportunity to earn more sales. The marketing costs per visitor have different dimensions than in physical retail. Online, the costs for getting traffic from other sites are an example (often charged per CPC, CPM, CPL, CPS, CPA…)

Question 13

4) Delivery costs:

Answer 13

the analogy with logistics costs is usually not applicable to the webshop. In traditional retail, logistics costs are all those involved in the physical flow of goods from supplier to shelf. Generally, consumers care about the flow from the sheldìf to their house. Here, the prices of the items do not usually include shipping costs.

Although we have seen a trend in recent years whereby shipping costs are getting lower, and free shipping is being offered. Physical retailers with a webshop are primarily encouraging free pick-up-in-stores due to the advantage for them that pick-up-in-store reduces the probability of returns and increases that of extra sales (15% of consumers use pick-up-in-store).

Question 14

S = sales There are various ways to achieve revenue growth. Some entail more costs and investments than others:

Answer 14

• Like for like growth (++++): This is the most profitable way to achieve revenue growth: from existing shops. There is no need to invest or increase the number of employees significantly. Because the costs remain low, the return on growth will be higher.
• Growth through franchising (++): As with like for like growth, there is no need to invest in new stores, but it will be necessary to spend more on monitoring the operation and part of the margins go to the franchisee.
• Growth through expansion (+): less directly profitable, but sometimes necessary to maintain the company’s market position. Investments will have to be made in new stores, and there will be start-up losses and other issues. As a result, returns may be negative in the first few years.
  With the advent of the Internet and the merging of all channels, there is a new challenge about sales. Looking at sales from the customer’s perspective, we will combine all the revenue generated by a customer, whether on- or offline.

Question 15

M = margin There are several ways to influence profitability from the standpoint of the margin:

Answer 15

• Improvement in conditions (++++): If we can buy cheaper without having to change the level of the selling price, this will translate into profitability. That is the most effective way. However, in order to take advantage of the improved purchasing conditions, we must gain a certain dominance over the supplier, which is possible if we have high sales volume and can show positive growth figures.
• Optimization of the margin mix (++): increasing or strengthening sales in high-margin product groups while slowing down sales, in relative terms, in low-margin product groups, increases the average margin of the total shop in the mix (for example: supermarkets place high margin/profitable items at eye level where are more likely to be bought). However, to control the margin mix, we need to change the layout of the store, and that can be expensive.
• Introducing supplier contributions (+): for example, special discounts in the shop, or advertising contributions.
• Reducing losses (+): Reducing theft(furti), breakage and administrative errors.

Question 16

C = costs Increasing the return earned by a retail business from a cost point of view can be done in the following ways:

Answer 16

• Reducing labour costs (++): Wage costs are the largest cost item for the retail sector, but they have decreased significantly over time.
• Reduction of fixed costs (++): The most important part of the fixed costs is real-estate costs (rents, depreciation, and so on). However, lowering these costs often requires considerable investments, such as relocation of a store.
  However, many retailers have been able to renegotiate their rents in recent years, especially in medium-sized shopping areas, allowing their operations to perform positively again. The cost structures for online operations are drastically different from those of their offline counterparts. Although the costs of renting a website are lower, there are many other costs to consider in the target formula.
• Reducing investments in stock (+/-): Can bring interest income, but these gains are relatively small, compared to the previous methods.

Question 17

The scissors effect leads to a deviation in passive policy between the actual and the desired developments of returns. This is called the strategic gap, and it can be bridged in a variety of ways:

Answer 17

1. Consolidation of the market position:
2. Repositioning:
3. Product development:
4. Market development:
5. Diversion:

Question 18

1. Consolidation of the market position:

Answer 18

Is about maintaining the current sales at lower costs - about doing the same thing, only better. This approach involves little risk.

Question 19

2. Repositioning:

Answer 19

Adapt the formula to create a new impulse for growth. Continue to serve the same target group with basically the same assortment, but in a different way. Is doing the same thing, but different. Involves more risk for the uncertainty of success of the innovation.

Question 20

3. Product development:

Answer 20

3. Product development: Adding new assortment that are closely related to those that are already available. There are some risks:
   - Overshooting the market: the new assortment may have a negative impact on the old product range, which may reduce the consumers’ linking for the formula.
   - Sector blurring: products that were previously sold by other companies are included in the range. Therefore, the formula faces more competitors than in the past, while the distinctive character of the assortment it carries may also decline. Product development should therefore always go hand in hand with the development of a new and unique selling proposition in the newly added ranges that can distinguish the retailer from what the competition is offering. Otherwise, we are just engaging in imitation and sector blurring.

Question 21

4. Market development:

Answer 21

Attract new target groups or markets not served before. The risk is that by appealing to new target groups, we may have to take measures that alienate the old target group from the formula. Moreover, we are much less familiar with the needs and wishes of this new target group.

Question 22

5. Diversion:

Answer 22

Diversification is the riskiest approach. This is about including new items and new assortments to reach new target groups. This strategy have both the risks associated with product development and those related to market development.

Question 23

generic growth matrix
1. Market penetration:

Answer 23

The additional and improved exploration of existing product-market combinations. Old product for the old market. This is like-for-like (or same-store) growth. Same-store growth is a very important variable within the retail sector because it indicates how the strength of the formula is evolving. Here the company should focus on optimizing the formula.
- Market penetration through cross-channel or omnichannel: means giving existing customers the opportunity to make purchases via the web and mobile. Customers who use multiple channels will buy more items from the company.

Question 24

generic growth matrix
2. Product development:

Answer 24

Making new products or assortments available to the existing target group → New products in the old market.
- Assortment expansion: adding to existing ranges in the same store
- Formula development: Serving the existing target group from a new store with acompletely new range.

Question 25

generic growth matrix 3. Market development:

Answer 25

Offering the existing formula in new markets or to new market segments. → old products in a new market. - Upgrading of the formula: if the new market segments involve higher-income target groups than before - Downgrading: if the new market segments involve lower-income groups - Expansion or filialisation: Reach-out to the same target group addressed as before in new regional market areas - Internationalization: if it concerns foreign markets. This often begins as market development, but often takes the form of diversification. - Market development through the addition of new channels (omnichanneling): allow consumers to make purchases in a different way (via web or on mobiles). This allows new customers to be reached. Another form here is platform commerce: opening up the platform to third parties - as a collaboration with pure players such as Zalando or Amazon.

Question 26

generic growth matrix 4. Diversification:

Answer 26

→ entry into a new market with a new product. The most difficult and risky growth (therefore rarely successful) strategy because we could not know the new market or not have the expertise of the new product. Considerations about the 4 strategies: The essence of the growth matrix is that each growth strategy requires a separate approach.

Question 27

For Growth through market penetration (old market/old product)

Answer 27

- The company should focus on optimizing the formula - This requires an attitude strongly focused on managing existing stores and maintaining the assortment - The strategy objective is ‘improve profitability per existing meter of sales-floor space’ The implementation of this strategy is often a matter for the local branch manager

Question 28

For growth through market development (old products/new markt):

Answer 28

- The company should focus on creating technical opportunities to open new stores - An external, project-oriented focus is necessary: it must consult with project developers, municipalities and real estate agencies. - In the implementation phase, it needs people who can carry out the work: people with a can-do mindset who can quickly scale up an existing concept - The strategic objective is ‘the profitable expansion of total market share or revenue growth, rather than the expansion of existing meters of floor space’ - The implementation of this growth strategy often ends up on the plate of the central sales function in the retail sector - However, when it comes to a strategy in which the Internet channel is added, implementation often ends up being owned by a marketing or IT department

Question 29

For growth through product development (new product/old market):

Answer 29

- Requires an externally oriented attitude with a focus on the wishes of the customers and coming up with creative solutions to satisfy them. - We need developers instead of implementers - The strategic objective here is usually ‘building new market share’ - The implementation in the retail sector often ends up at procurement