Content Guy's Note: The goal of "The Innovation Conversation" is to explore some facet of the fast-changing, technology-driven retail landscape and how it affects businesses and consumers. It is, we think, fertile territory ... and one that Tom Furphy - a former Amazon executive, the originator of Amazon Fresh, and currently CEO and Managing Director of Consumer Equity Partners (CEP), a venture capital and venture development firm in Seattle, WA, that works with many top retailers and manufacturers - is uniquely positioned to address.
This week's topic: Interconnectivity, Collaboration, & Ecosystems, and why these are critical to any retailer's success in the new world order.
And now, the Conversation continues...
KC: This year marks a decade since the introduction of the iPhone, which, when first sold, had something like 500 apps. Now, there are 2 million available apps for the iPhone, and 2.2 million apps for Android smartphones. And the thing about that is, there never would’ve been so many apps had companies like Apple tried to do them all in-house. This is a long way to get around the subject I wanted to talk about this week - the importance of collaboration with third parties as a way of making any single product or service more robust simply because there is interconnectivity. Having just spent time at a couple of retail conferences, that’s something I think that retailers (and manufacturers) need to start thinking about - making their organizations nimble enough to work with other organizations, which ends up making them both more relevant to shoppers.
Tom Furphy: This is a subject that I started to appreciate at Wegmans, really began to understand at Amazon and then built a passion and conviction about since. I think it’s really relevant to our industry, especially today. Whether you’re talking about store experiences or the underlying technology required to serve the shopper, it’s very difficult for a retailer to single-handedly offer best-in-class capabilities on their own. I think it is critical to collaborate with a network of specialized third party services in order to be nimble and to meet the ever-changing needs of the shopper. And I think shoppers are starting to expect this and will ultimately expect these services to interconnect wherever it makes sense.
Traditional retail merchandising, operations and store management teams are deeply skilled in running their own stores and being the primary interface of the customer experience. These core service elements may want to be kept in house. Also, traditional retail IT teams are charged to operate the core technologies that run the business and protect the assets of the company. Most have built years of proficiency in running these effectively. So, in some cases, it may be considered too risky to partner in these areas.
However, the innovation that is happening in consumer-facing capabilities and technologies is significant. There is no way that a single retailer can keep up with it all. Therefore it behooves a retailer to develop the agility to work with a network of partners to help them deliver their customer experience.
KC: The interesting thing about the Apple example, by the way, is that, if I recall correctly, Steve Jobs originally did not want to create an app store that was open to third party developers. Which I guess shows that even the most enlightened, progressive, forward-thinking and legendary businesspeople can be myopic. That’s an important lesson for retailers, I think - it isn't a crime to be myopic, but it is a kind of business malpractice not to try to get beyond that mindset.
TF: This is so true. I think being myopic in focusing on the customer is a good thing. But being myopic in precisely how to serve them can be dangerous.
Jeff Bezos says to be stubborn on vision, but flexible on details. That allows you to keep proper focus on the customer, but gives you room to test and make small mistakes along the way. Without that long term conviction and short term risk-taking and flexibility, I don’t know how you can succeed today.
When I work with retailers I challenge them to have a point of view about their shopper. Who are they? Where are they? What are their needs today? How will those needs change in the future? Then, based on the answers, the retailer should determine how they can serve that shopper in a compelling way - ideally in a way that is unique and differentiated, and that makes their customers’ lives better.
Companies that follow the old school mindset of “this is how we do things around here” or “we build everything in house” will struggle in the coming years. It will be difficult for them to be agile and impossible to serve customers in ways that they will demand in this rapidly changing environment.
KC: We use the word ecosystem a lot to describe Amazon’s approach to marketing, but I think that what businesses have to do is create a different kind of ecosystem - one that builds a network of flexible and complementary products and services that adds value not just for the eventual consumer, but also for the various entities that make up that ecosystem.
TF: I agree. There are three concepts here that are important to understand. Platform, services and ecosystem. First you need a place for everything to come together. That’s the platform. Then, you add an expanding and flexible set of services to sit on that platform. As these services connect with each other the result is an ecosystem.
Amazon is a platform with a broad and interconnected set of services that serve customers in very powerful ways. In Amazon’s case, they use both external and internal services, which they bring together to serve their customers are their own. They control the ecosystem. And the sum of these services is proprietary and differentiating to Amazon.
As retailers and manufacturers think about taking this approach, they need to think about they themselves becoming platforms and building ecosystems to serve their customers. The best retailers will have a laser focus on the shopper, will be a platform that innovates on their behalf and will assemble an ecosystem of capabilities and partners to support the business.
This encompasses both technology and services, developed in-house and with third parties. Services such as e-commerce, replenishment, chef stations, meal solutions, nutritionists, everything, can be viewed as services that exist on the retailer’s platform. As these services are developed in house and with partners, they can interconnect and in turn improve each other. New services can be easily added. As shoppers use the services, volume and synergies increase. The ecosystem becomes more powerful than the sum of its parts.
KC: And in doing so, maybe that’s what companies have to do internally, as well …. create ecosystems in which the pieces are flexible and fluid and sort of fill in the gaps and add strength to the overall business, rather than serving as fixed pieces of a puzzle being assembled by leadership; after all, with every passing day, what the business may need the completed puzzle to look like may change based on fast-changing realities. (They used to call this breaking down silos, but I’m not sure that’s a nuanced enough word these days.)
TF: Absolutely. As the customer changes, the retailer will want to be able to interchange the parts as they go. They will want to have a set of standard protocols that they can have their partners plug into. Stores need to become more configurable, but with good controls and standard procedures. Technology connections must ensure that the company’s assets and customer information are kept secured and that data flows in and out efficiently. The onus should be placed on the ecosystem partner to be able to work within industry-standard or retailer specifications.
Retailers should also use ecosystem partners to speed up their innovation cycle times. We often go through months of working with a retailer, showing them where we think the space is going and demonstrating a great technological capability to help them get there. They become convinced that it is the right thing for their customers. Then they start a process to determine if they should build it themselves vs. work with a third party.
This “build vs. buy” decision process invariably adds three to six months to a process that has already taken six to nine months. And during that time Amazon has kept running circles around them. Sometimes the “build” decision pencils out for the retailer. But that is a very short term view. By the time the retailer has it developed, the service provider is two versions further down the road because they innovate on this single capability 24x7.
KC: Here’s a possibly radical thought for you. Do you think that perhaps senior leadership in organizations ought to be evaluated and compensated based on their ability to create and nurture these external and internal ecosystems?
TF: It’s not a bad idea. But it would need to be carefully implemented. The risk is that leaders could over-focus on building ecosystems and lose focus on the customer. You wouldn’t want them to create ecosystems just to create ecosystems.
Perhaps leaders should be required, every year, to one-up their customer focus. They could be measured on developing new shopper capabilities that elevate their customer experience. That would prompt them to regularly examine all aspects of their business and to propose ways to make them better. Many retailers do this today, but they often don’t think big enough.
If the bar is set high enough and leaders are challenged to hit these marks on an appropriately brisk pace, I think it will force them to build an ecosystem of internal and external partner capabilities to meet the goals. From there the goals could focus on the partnership ecosystem and how it is being expanded and nurtured.
Frankly, they have to be doing this today.
The Conversation will continue...
- KC's View: