The 3 Immutable Laws of Retail Innovation
Updated: Jul 13, 2019
Everyone in the retail industry, from the cashier to the CEO, knows that transformation and disruption are changing the way we shop. But too many retail executives are dealing with the symptoms of innovation rather than addressing the underlying forces. And this approach is dangerous, leading executives to make short-term tactical decisions without benefit of understanding the larger battle being waged.
There are three immutable laws of innovation that frame today’s retail environment:
Law #1: From today onward, innovation will occur ever-faster.
Computer processing power is growing exponentially, and is driving the use of artificial intelligence using big data to power new innovation. We are at the point of inflection on the growth curve where the pace of change noticeably increases. Innovation is being driven by new technologies and capabilities that are themselves feeding off new capabilities, creating a tsunami of innovation that is growing ever stronger.
Law #2: Retailer deployment of new innovation will remain sequential and linear.
Any retailer has limited bandwidth and resources to evaluate, acquire and employ new technologies. This means that retailers tend to deploy new capabilities in a sequential fashion; a new website, followed by a new mobile app, followed by promotion optimization, followed by something else, and so on over time. Each new innovation often requires associate training, changing operating processes and other impacts. This linear growth of innovation is problematic in a world of exponential growth of technological capability.
Law #3: The innovation gap will continue to grow.
Think of the difference between the more linear growth of innovation deployed at traditional retailers and the rampant growth of tech-fueled innovation as the innovation gap. This gap grows by the day, and represents a clear and present danger to retailers. It is from this gap that new capabilities and new competitors emerge, enabled by faster and cheaper processing power, big data, AI and the cloud.
Technology-driven innovation has forever changed the retail landscape, and the largest companies have recognized this new competitive reality and are investing resources accordingly. Consider that Amazon invested $15 billion in new tech innovation last year, more than the combined investments of the next 20 retailers, excluding Walmart. Kroger now employs 2,500 people in its technology division and is investing heavily in new digital capabilities. Walmart has set up an incubator called Store No. 8, charged with identifying, evaluating and investing in new technologies focused around AI and automation.
In the face of this, 75% to 85% of IT budgets at traditional retailers go to maintaining or upgrading existing systems—not new innovation. This profound difference in how technology and innovation is viewed exacerbates the innovation gap threat.
Flowing from these immutable laws are several fundamental challenges that retailers confront:
Retailers no longer lead. Innovation is now being forced on retailers from new competitors such as Amazon and rapid consumer adoption of new technologies. Retailers are no longer in the driver’s seat regarding what capabilities they need to deploy; rather, retailers today must react to outside forces.
Change will happen much faster than you think. Any specific innovation will become widely adopted much faster than executives believe. Human beings have difficulty thinking exponentially; we are accustomed to linear change. Tomorrow will be much like today that was much the same as yesterday. This is no longer true. By the time some new innovation appears on the radar of retail executives, it is probably already moving toward mass adoption.
Awareness of new innovation. Simply trying to maintain awareness of new capabilities and solution providers is nearly impossible for retailers. To provide some perspective, Walmart’s Store No. 8 initiative reviews an estimated 700-750 new solutions each year. How can a traditional retailer keep up with this?
Limited ability to test and deploy. Even if a retailer is able to gain an expansive view to new innovation flowing into the industry, how does a retailer decide which capability to focus on, what solution providers to talk with and which solution to pilot, let alone utilize across all their stores?
Organizational skill sets. Given new capabilities that are rapidly transforming retail, such as robotics, artificial intelligence and customer insights, how do retail companies ensure they have the right skill sets needed to take advantage of new capabilities? How do you structure your organization to facilitate rapid change? There are implications here across the enterprise, from incentive plans to training programs, to having the needed skill sets when required.