BUILDING COMPETITIVE ADVANTAGE

IN RETAILING
Key issues
• The Pentagon represents the five major customer-facing activities through
which retailers can visually differentiate themselves in the marketplace:
 place,
 product,
 value,
 communication and
 people.
• It can be difficult for incumbents to re-evaluate and rejuvenate their positions
on the Pentagon, and it is often new players who invent or develop new
sources of competitive advantage in retailing.
• The triangle supports the pentagon in the retailer’s goal to achieve operational
effectiveness through superior systems, logistics, and supply relationships.
• There are several ways to build competitive advantage in the retailing arena.
• At a generic level, students of strategy have identified three major strategic thrusts:
 cost leadership,
 differentiation, and
 focusing on a niche.
• A niche strategy is certainly a viable strategy when playing in the corners, or in
limited segments of the market.
• However, as niche players grow more successful, niches inevitably become larger
and less defensible.
• As a result, retailers are often faced with a choice between the market strategies of
cost leadership and differentiation. 
• We refer to differentiation activities as working on the pentagon, and
cost-leadership activities as working on the triangle.
• Michael Porter has written that strategy is about being different, and
that it is not operational effectiveness.
• It is the pentagon on which retailers register their differences in the
minds of customers, but it is the triangle on which retailers achieve
operational effectiveness, and while operational effectiveness is not
strategy, if a retailer is not operationally effective, then that is goal
number one.
The Pentagon

• All retailers have a position in the marketplace on all five corners of

the pentagon.
• The pentagon represents what the customer can see when walking
into the store, visiting the website, or looking at advertising and
promotion—in other words, customer-facing activities.
• There are five major ways in which retailers can visually differentiate
themselves from other retailers in the marketplace.
• All five corners of the pentagon also have important subcategories.
• Most retailers do have a paradigm about how they are running the
business.
• However, the greatest single weakness of most retailers is that they
don’t often go back and re-examine that paradigm
—re-examine whether what they are doing in all the subcategories of the five
corners of the pentagon is still the best way to run the business
—in light of a changing economic environment, a changing consumer
environment, including consumer buying behavior patterns, a changing
technology environment, and a changing competitive environment.
• The stronger a retailer is on the pentagon, the more customers it can
draw to shop in its stores or on its website.
• The ability to draw customers from great distances powers higher
sales productivity in bricks-and-mortar stores.
• Likewise, an appealing and easily navigated website also can be
attractive in drawing customers to a retailer online.
• Winning on the pentagon means driving the top line.
The Place Variables

Every Channel
• With the advent of online shopping, retailers need to be where their
customers expect to find them, whether that is in bricks-and-mortar stores, in
mail-order catalogs, or online. The idea of omnichannel retailing is to be able
to deliver a seamless, integrated experience for the customer across all
channels.
Store Size
• One of the issues related to the bricks-and-mortar place is store size.
• The way to think about store size is for the retailer to take each department it
wishes to be in and ask how much space it takes to win in that particular
department in the store.
• This question is particularly important if the retailer decides it needs a dominant
assortment in that particular department.
• Then, add up the required square footage in all the departments that you wish
to be in and that determines your store size.
• Of course, size is not an issue on the internet.
• Theoretically, a retailer can have an endless aisle on its website, provided it has
the capacity and technology to deliver an infinite assortment.
Location
• A second subcategory related to place is location.
• There are several issues related to location.
• One issue retailers don’t ask themselves very often is what the optimal
distance is between stores.
• This issue is especially appropriate for the large and/or growing chain.
• One thing seems clear:
 If a retailer has stores that are two miles apart, the farthest each store can draw is one
mile, which is half the distance to the next store.
 Even if that store down the road two miles is a competitor, but is a very similar store, the
answer will still be the same.
• The farthest a retailer can draw a customer is half the distance to the
next similar kind of store.
• Most traditional department stores suffer from this problem.
• As most local and regional department store chains grew during the
last 40 years, they became the anchors of every suburban shopping
center in the region.
• Now, the farthest those stores can draw is half the distance to the
next mall.
• If you limited your sales-per-square-foot opportunity by locating your
stores relatively close together, there is only one way to still ensure
good operating profits per square foot and that is by having very low
operating expenses per square foot.
• There are several retailers that understand that paradigm and have
learned to make a lot of profit per square foot on relatively low sales
per square foot by deciding to become cost leaders, and to become
leaders in productivity.
• Another location concern has to do with not just how far away my next
store is, but the quality of the location itself.
• Many chains have built location models to help project sales per square
foot for new and existing locations.
• Wal-Mart has a 1,000-variable traiting model that it uses to predict what its
volume will be at a particular location.
• In addition, that model also is used to divide all the Wal-Mart stores into
groups that have different merchandise mixes that are then fine-tuned to a
particular kind of population, in a particular climatic zone, with a particular
buying behavior pattern expressed by consumers in those markets.
Layout and Design
• Another subcategory related to place is layout and design.
• The retailer that views layout and design as an expense rather than an investment in
competitive advantage doesn’t understand how people shop stores, and doesn’t
understand the role of store environment as a critical determinant of store choice.
• Some retailers spend a lot of money per square foot for design and construction
and others spend very little.
• This decision depends upon which business a retailer is trying to be in and whether
the strategy is to be a low-cost player or whether the strategy is one of high
service/high margin.
• But, layout and design is just as important as any other element of place or any
other element in the overall marketing strategy.
• It also is important to look beyond what is spent to build and open
the store.
• The more successful the store, the more traffic it attracts and the
faster it becomes tired.
• Chains also need to spend money regularly to renovate and refresh
their existing stores.
 For example, Zara and H&M refresh their stores every two years.
Online Offer
• The online place, the website, is not so much a question of size and location,
but more a question of online offer.
 For example, an office supplies retailer might have a website that can serve three
segments of the market, end consumers, small businesses, and corporate customers.
• The website might be adapted for both mobile and tablet access.
• The offer also could include useful apps, blogs, and social media access such
as Facebook, Twitter, and Pinterest.
• Another important issue for the online offer is what security features are
available.
System Usability and Navigation
• Just as store layout and design are important to bricks-and-mortar stores, so,
too, is system usability and navigability to the website.
• Ease of use is very important here, beginning with the ease of a login.
• Then, other important features include the ease and completeness of product
search results, stock availability messaging, and product details.
• Customers appreciate product recommendations, personalized content, and
help centers and the availability of live chat.
• Finally, an easy checkout experience also is critical.
The Product Variables

Merchandise Intensity
• Merchandise intensity in the bricks-and-mortar store is measured by how
many dollars the retailer has invested per square foot at cost in inventory.
• In general, it has been shown to be more or less true and consistent across
retail sectors that higher merchandise intensity leads to higher sales per
square foot (up to a point, after which additional inventory becomes
counterproductive as the store becomes hard to shop).
• In the year before Macy’s went into Chapter 11 bankruptcy (1992), the
company reduced their inventory 18 percent, most likely in an effort to
produce desperately needed cash flow.
• Not too surprisingly, Macy’s sales fell 18 percent in that same year.
• There is a relationship between stock intensity and sales density.
• There is another problem, of course, because the retailer that chooses to
stock high and deep still has to figure out a way to get it out of the store.
• And, there are only two ways to get a lot of merchandise out the door.
• One way is to price it hard—which means being the cost/price leader.
• The other way is to sell it hard—which means being the service leader.
• The concept of merchandise intensity has little meaning for the retailer’s
website because there really isn’t anything like inventory per square foot
in the online world.
Merchandise Assortment

• The second major subcategory related to the product corner of the

pentagon is merchandise assortment.
• A key question here has to do with how a retailer gets the right
assortment.
• Does the retailer, for example, depend upon a set of buyers who by
some well-calibrated instincts are very good at going out there and
always buying the right merchandise at the right time?
• If you are in the fashion business, that approach takes a lot of faith in
the buyers being able to consistently, time and again, go out and find
the right merchandise for their customers.
• Alternatively, some believe the right merchandise in the store can be consistently
generated only by being market driven.
• Being market driven means that the retailer must find a way to let his or her
customers tell the retailer what they want.
• By using the right measurements, a retailer can soon discover whether an item is a
winner or a loser.
 What isn’t known, however, is all the items not yet tested.
 Or, is more testing needed
—how much, and how often
—with bellwether stores or photos, or whatever?
 How many items should be tested, for how long, to determine their potential?
 The concept is the same for both food and apparel, but it’s a lot easier for a food retailer to do
that on a systematic and continuous basis.
• Another aspect of the merchandise assortment subcategory has to do with
assortment strategy.
• The key here is what the retailer is trying to offer the consumer and what
role assortment plays in that offering.
 For example, a convenience assortment means we are in the business of saving
people time rather than money, and we are not offering a wide choice.
• On the other hand, a power or dominant assortment means “I’m
committed to offering the largest assortment in the marketplace.”
• Category killers such as Toys “R” Us in toys and games, Home Depot in
hardware/home improvement, and Best Buy in consumer electronics come
to mind.
• A competitive assortment is one pretty much the same as that offered
by most others in the marketplace.
• A differentiated or focused assortment means a unique assortment
that can’t be found elsewhere.
• It means you are the only place where the customer can find this
assortment in the area.
 Examples include the Body Shop, Papyrus, and Anthropologie. Private-label brands also
can provide differentiation.
 For example, you can buy Gap jeans only at the Gap, and you can get Craftsman tools
only at Sears.
• The warehouse clubs such as Costco and Sam’s Club offer velocity
assortments.
• This strategy means that the store carries only one SKU per product class.
• They ask the customer to give up choice in order to get a very low price.
• Another price-focused assortment strategy is opportunistic assortment.
• In this strategy, everything in the store is bought on deal—something less
than the full cost of goods sold price to suppliers.
• Dollar General follows this strategy, as do T.J. Maxx, Marshall’s, and Ross
Stores.
• Within assortment strategies, retailers also define categories in terms of
width and role with descriptors such as leadership, authority,
complimentary, traffic builder, assortment enhancer, and impulse.
• Depth of assortment refers to the proportion of the category devoted to
entry, good, better, and best lines.
• These assortment strategies apply to both bricks-and-mortar and online
stores.
• However, a key question retailers must ask is whether the online assortment
should be the same as the in-store assortment, or smaller or larger, and
what the implications are to customers of a decision to be smaller or larger
online.
Style and Fashion

• We generally think of apparel when we think of style and fashion.

• However, there also is style and fashion in furniture and home furnishings,
consumer electronics, and even in food—just check out a Whole Foods
Market or a Wegman’s grocery store.
• In apparel, consumers have a vocabulary they use to describe fashion items
they purchase.
• They use the words “very latest, most fashionable,” “current, up-to-date,”
“everyday, basic conservative,” “contemporary,” and “classic.”
• One way to visualize a fashion market is to build a perceptual map of,
 for example, fashion (on a continuum from high to low) versus value for the money
(on a continuum from best to worst). 
•  The resulting map would show four quadrants, with one being high fashion/worst
value, such as Neiman Marcus (frequently referred to as Needless Markup).
• A second quadrant might be low fashion/worst value, where Kmart might come to
mind.
• A third quadrant would be high fashion/best value, which is where the fast fashion
players such as Zara and H&M reside.
• The fourth quadrant would be low fashion/best value and might include off pricers
such as T.J. Maxx.
• Similar thinking could be applied to other categories, such as consumer electronics
or furniture, where, once again, retailers must consider the perceived uniqueness
of their offerings along with prevailing trends.
Ethical and Sustainable

• In recent years, ethical sourcing and sustainability have become

significant issues for retailers.
• These terms imply that the products a retailer sells are certified or
accredited as being manufactured and sourced ethically and/or
sustainably in a way that minimizes harm to the environment and
complies with the retailer’s philosophies.
Value

• Value is what you pay for what you get.

• It’s a combination of the price and quality variables, although it appears more and
more driven by price.
• In most retail sectors, price is 50 to 60 or more percent of the total value equation in
the mind of the customer.
• In food, price is 90 percent of the value equation, while in fashion the price/quality
relationship is more like 50/50.
• And, in some categories like fashion, there is more than one value position.
 For example, a retailer can be low price/low quality such as Wal-Mart and be high value to a
particular market segment.
• Or, a retailer can position itself a little further upscale, as has Kohl’s, with modest
quality/modest prices, and be high value to another market segment.
• And, so on—until we find a chain such as Neiman Marcus operating with among
the highest prices and the highest quality and perceived as good value by a
relatively small, very upscale segment of the market.
• As we consider online retailing, we need to think in terms of total price, including
any delivery charge that may apply.
• Another consideration is how the retailer will set prices.
• Two often-used strategies are everyday low(est) prices (EDLP) and hi-low pricing.
• EDLP is just what it sounds like, while hi-low means the retailer has a small
percentage of its items on sale each week, with the rest of the items at full price.
• Wal-Mart is probably the most well-known proponent of EDLP, while Target and
Kmart are hi-low pricers.
The People Variables

• The people corner of the pentagon also has three subcategories:

service, knowledge, and climate.
Service Offer
• The service subcategory has to do with the service levels the retailer wishes to
execute.
• There is a continuum of customer experience retailers might offer from self-
service to high-level retail employee service.
• The service level a retailer needs to execute depends upon the type of retailer
it wishes to be and how it wishes to be positioned in the consumer’s mind.
 For example, executives in a department store chain might ask what the longest period of
time is that can pass when a customer enters a department before being acknowledged by
a sales associate. 
• Or, a more self-service organization might set a service standard in
terms of how long it takes a customer to actually make a purchase
and leave the store.
 For example, Wal-Mart’s standard is three’s a crowd.
• Three’s a crowd means that once each checkout station in a Wal-Mart
store has two people standing in line, the store manager must open
another checkout station.
• This standard says something about the number of checkout stations
a particular store needs and about labor scheduling and employee
training.
• Another way to think about service is to measure service intensity.
• Service intensity is defined as the number of square feet being
managed by each full-time equivalent employee.
• A high number here indicates relatively low service and coverage,
while a low number means high service and coverage.
• Online, people also offer service.
 For example, the retailer might provide a call center or offer live chat.
Knowledge

• The second issue on the people corner of the pentagon has to do with
the knowledge levels a particular retailer wishes its employees to
possess.
• There are only two ways for an employee to obtain a certain knowledge
level.
• One way is for the retailer or supplier to train the employee.
• The other way, of course, is to hire employees, sales associates for
example, who already have that knowledge.
• Online knowledge might be provided by on-site reviews and by product
comparisons.
Climate
• The third issue related to people is the concept of climate.
• There are two dimensions to climate.
• The first dimension has to do with what customers think about what it is like
to shop at a particular store.
• The second dimension has to do with what employees of a particular store
think about what it is like to work there.
• A third question has to do with consistency—do the climate the customers
experience and the climate the employees work in need to be the same?
• A major challenge for retailers is to ensure consistency of climate and
experience for customers from website to store and vice versa.
Communication
• The last corner of the pentagon is communication.
• For many retailers, communication is a tough problem.
• It is tough because if a store or chain doesn’t win on place, with a better or
bigger or better designed location or website;
 doesn’t win on product, more intensity or better assortment or the right fashion
position; and
 doesn’t win on value or service, what can it say about itself?
• If the chain isn’t a winner on one or more of the five corners of the pentagon,
about all that’s left to do is run a sale—in other words, do promotional
advertising to generate immediate response.
• Positioning advertising is communication that tells the customer a
retailer wins on one or more corners of the pentagon.
• Positioning advertising is Nordstrom talking about having its massive
assortment of men’s suits or its thousands of pairs of shoes.
• Similarly, Wal-Mart or Food Lion advertising everyday low prices
(EDLP) also is positioning—positioning themselves as the low-price
leaders in their markets.
• Bunnings, the Australian home-improvement retailer, boasts of lowest
prices, widest range, and best service.
• Another important aspect is the role of the brand in positioning and
communication.
• This includes not only the store brand, but also the various product
and service brands carried within.
• Online retailing offers additional opportunities to personalize
communications from retailers to customers, allowing information,
offers, and recommendations provided to customers to be tailored
specifically to them.
Changing the Pentagon
• The pentagon is the retailer’s face to the public and to its customers.
• The corners of the pentagon hold few secrets from competitors, because they are all
very visible.
• Why do some firms fail to re-evaluate their position on the corners of the pentagon?
• The most obvious answer is that many retailers are not systematically tracking the
changing consumer, economic, and competitive environment, and, as a result, they
are not really aware of what is happening out there.
• Frequently, the environment is changing faster than the retailers.
• Another explanation is that companies sometimes get old and tired and fail to
rejuvenate their management.
• They end up suffering from what has been referred to as paradigm paralysis. 
• Or, some companies are unable to change on the corners of the pentagon
because they don’t have the financial resources.
• Frequently, this problem surfaces after a private-equity buyout.
• After a buyout, of course, the first call on the retailer’s cash flow is the interest
on the debt—not fixing the place, website, product, service, or advertising, and
so on.
• The pentagon’s corners are easy to see and understand.
• But, for most retailers, it is difficult to execute on those corners in such a way as
to build a really sustainable competitive advantage.
• And, once set on a particular corner of the pentagon, the bottom-line focus most
retailers have on ROI tends to insure inertia.
• Often, it is new players who invent or develop new sources of competitive advantage in retailing.
• Frequently, the incumbents are reluctant to change because they have made an investment in
the present.
• The new players may come from many backgrounds.
• Sometimes they are former losers who have learned something—Sol Price at FedMart and then
Price Company comes to mind.
• Or, maybe they left a winner, such as the founders of Costco, former senior managers at Price
Company.
• Sometimes, they are brand new entrepreneurs, such as Build-a-Bear.
• Sam Walton was a successful Ben Franklin franchisee who tried for years to get Ben Franklin to
commit to discounting in small towns.
• Finally, when Franklin would not support the concept, Walton did it himself.
• Bernie Marcus and Arthur Blank were fired from Handy Dan Home
Improvement Centers and went on to found The Home Depot.
• TJX grew out of Zayre, and so forth.
• Amazon.com has transformed the industry, starting with books, and
then moving on to other categories, by bringing retailing to the
internet.