Business Forum: When Elephants Learn to Rock and Roll

By Isaac Cheifetz
Published April 7, 2002

The war in Afghanistan and the Enron scandal overshadowed Kmart declaring Chapter 11 bankruptcy in January. How did such a prominent retail chain fail?

Retail is a difficult industry. It answers to fickle trends. Over time, apparel chains such as Merry Go Round, The Limited, and The Gap have expanded and contracted.

It has low profit margins; a supply-chain software executive once told me that a national grocery chain made its profits the weeks of Thanksgiving and Christmas -- the rest of the year they broke even.

And it is a mature industry, with an abundance of competitors.

In the face of such challenges, why are Target and Best Buy two of the most exciting, rapidly expanding retailers in the country and consistently among Minnesota's best-performing large companies (ranking No. 1 and No. 4, respectively, on today's 11th annual Star Tribune 100)?

Leo Tolstoy wrote that "Happy families are all alike; every unhappy family is unhappy in its own way." For businesses as for families, there are a handful of essential attributes that all successful ones share; lacking any one of them, a company will be dysfunctional.

An investor using Peter Lynch's principal of "invest in what you know" might say Best Buy and Target have quality merchandise at low prices, good service and a certain "sizzle." They might describe Kmart as having quality goods but still combating the albatross of its once-successful "blue light special" strategy.

Faulty Execution

Kmart's bankruptcy surprised no one who has followed retail information technology trends. As far back as the late 1980s, Kmart was spending millions of dollars on state-of-the-art inventory management systems. But the systems were a technological Band-Aid on unhealed business wounds and did little to improve the customer experience, market share or profitability.

Significantly, the event that spurred Kmart into bankruptcy was a national newspaper insert promotion that was not coordinated with inventory planning, causing serious losses. Kmart was attempting to compete with Wal-Mart on price, but lacking the underlying focus and efficiency of Wal-Mart, Kmart's efforts fell flat.

In contrast, what attributes do Best Buy and Target share?

• Creativity. Both have enhanced their customer value proposition and brand. Best Buy changed the store experience from a McDonald's-like fast-turnaround sales model to a Barnes and Noble-like, "stay-and-play" hangout for enthusiasts. 

Best Buy also has intertwined product offerings (PCs with MSN Internet service, DVD players with Netflix DVD rental programs) to make the sum greater than its component parts. Target has kept prices low but continues to subtly and creatively raise the caliber and style of its products, to the point of becoming a serious competitor to the Gap in apparel, among others.

• Aggressive change. Both have created a risk-taking culture, encouraging aggressiveness, including a willingness to make mistakes. Target and Best Buy built consumer e-commerce sites during the past three years. 

Their Web sites still are a priority, but Target has outsourced its site to Amazon, and Best Buy now recognizes that its site is as effective at providing product information as it is at generating revenue, influencing a considerable number of buying decisions that are either submitted on the Web site and picked up in the store or completed wholly within the store.

• Competence before technology. Both are successful at intertwining process optimization and automation. They know that technology has the impact of a race car: a skilled driver will go faster; a mediocre driver will hit the wall.

Before General Motors found total quality management religion, it spent billions on robotics to automate its factories. GM cars continued to be poorly assembled. Toyota had virtually no robotics at that time, yet made the most error-free cars in the world. The efficiencies came from just-in-time systems implemented with cardboard signs at the bottom of pallets.

Similarly, e-commerce investments are effective only when used to automate smoothly functioning organizations. These efficiencies allow Best Buy to open smaller stores in population centers that cannot support a "Super Store," much as Wal-Mart did in its expansion phase.

• Blurring the corporate data boundary. Both recognize that intranets and business-to-business e-commerce systems are similar in form and function, shifting in name only as one passes outside the formal boundaries of a company.

Companies that pursue process improvement aggressively, as a competitive weapon, will gain new sources of revenue, lower costs and better relationships inside and outside the corporation.

• Substance before branding. Both base their message on their actual strengths. A company can spend millions, even billions, on changing its image through advertising. But if the image conflicts with the customer's experience, it will generate snickers, not sales.

Recovery at Hand

As the second quarter of 2002 begins, the economy seems to be growing healthier. And, as in 1971, 1989 and other years after a downturn, large companies are more resistant to a downturn. Like elephants in a tornado, they are less likely to be blown away.

But size will protect a company for only so long. In a networked economy, trends -- negative or positive -- manifest themselves more quickly.