Organizations, Systems|

A winning brand strategy is essential for a successful business strategy. Done right, the brand strategy clearly articulates the customer value proposition – why our customers pick us over the competition. Leaders know this and strive for the clarity of purpose a winning brand strategy provides. A simple and compelling brand strategy can focus everyone’s attention on a very small number of strategic priorities that define strategic success, providing a “true north” to focus on.

Yet when it comes to implementing the brand strategy through the operating model, that same sense of clarity and purpose is often lost. An enormous amount of complexity has to be addressed to bring it to life in the areas of organization design, staffing, developing capabilities, goal setting, accountability for performance, operational excellence, and so much more. That complexity is why organizations struggle with many aspects of strategy execution.

What if we could develop a brand strategy for the operating model? A winning operating model brand strategy has to provide a clear vision of what the organization stands for operationally, something we can all rally around and use as the true north for how the work is organized, staffed and performed.

Some companies already have successful operating model brand strategies, but many more do not. Complicating the situation, the drive to add new products and services, shoring up the business model through greater organizational complexity, makes it hard to have a single unifying operating model brand strategy. You often have to have multiple operating model brand strategies, and work to integrate and align them so that they are all successful.

Corporate values and vision are good but only if they point us in the right direction

Is the customer “always right”? This corporate value is championed in many B-to-C retail businesses, and is a powerful way to get alignment around a critical strategic objective. But what does it mean in practice? How is it applied the right way?

High-end retailers like Harrods and Neiman Marcus live and die by this credo. In their part of the highly competitive retail space, maintaining trusted relationships with their best customers is a core part of the brand strategy. “The customer is always right” provides a very powerful true north so frontline employees don’t lose sight of what creates value for the enterprise.

The beauty of “the customer is always right” mantra for high-end retailers is that it is a winning operating model brand strategy. Its simplicity hides an incredibly complex set of decision rules, organizational capabilities, and accountabilities that are well below the surface. If Harrods and Neiman Marcus fail to create a “customer is always right” experience, they don’t deliver their corporate brand strategy, lose profitable clients and miss their financial targets.

How far is a frontline employee at these stores allowed to go to please the customer? The answer is complicated, with increasing numbers of organizational players involved as the demands become more onerous. One set of accommodations can be handled immediately by the frontline employee. A second set requires only a brief consultation with other team members in their department, which can be handled by a quick check-in taking only a few extra minutes. A third set requires the department manager weigh in, which may mean the customer waits up to an hour for a response. A fourth set requires the store or district manager weigh in, which can lead to delays of up to a day or longer.

The best frontline employees have very deep knowledge of the store’s business model, and know why they have unilateral discretion in some cases, and bounded discretion in others. Each player in the system – the team member in the department, the department manager, the store manager and the district manager – knows the bounds of their decision-making authority, how far they can go to please the customer, and when they have to pull in a broader set of decision makers to weigh in.

To make it all work, the organization must have consistent enterprise-wide processes, accountabilities and rewards that reinforce the right behaviors. Talent is recruited, developed and promoted so that the right people are in the right roles. Leaders ensure it all comes together as an aligned system, not a set of disjointed parts, extending into the entire back end of the organization design, including purchasing, supply chain, warehousing, customer service, etc. so that the corporate margins, volume, growth, and market share goals are achieved and exceeded.

A key system design element for high-end retailers is ensuring they virtually always have in stock the key items customers want. Out-of-stocks risk ruining the trusted customer relationship which is painstakingly built over time. The operating model brand strategy of “the customer is always right” tells leaders to structure the organization, supply chain and executive decision making to ensure there is enough slack in the system and out-of-stocks are extremely rare. Those operating model principles ensure the success of the business model: selling high-priced, lower-volume products with high-touch customer service and very high margins.

Only the highest-end retailers can succeed with a “customer is always right” operating model brand strategy. All other retailers have a different business models and have to and organize around different customer value propositions. For these other retailers, a “customer is always right” operating model brand strategy would send the wrong message and destroy shareholder value.

For WalMart, the customer value proposition is “everyday low prices” which is realized through the efficiency of their supply chain, lower-cost real estate store locations, and massive store footprints that enable extremely high sales volumes per store. The last thing WalMart wants is to empower frontline employees in the stores to make independent decisions that would interfere with the efficiency of that organization design. If a customer is disappointed by a product out-of-stock, the only recourse is to come back another time – or order it online. Any other course of action would ruin the economics of the company’s strategy. WalMart’s brand strategy dictates that the customer most certainly is not always right: the burden is on the customer to come to WalMart only when the products they want are in stock, which of course they can’t ever know for sure.

Is “keep the customer happy” a good operating model brand strategy? The devil is in the details.

Consider now the fast moving consumer product goods companies (FMCGs) that sell through retailers like WalMart and Tesco. The FMCGs business model is to provide trusted products at a reasonable price that are available everywhere a customer wants to purchase them: in grocery stores, convenience stores, gas stations, etc. Their competitive advantage comes from branding and the strength of their go-to-market systems which move millions of units everyday from their manufacturing facilities to the retailers stores and shelves.

In order for the FMCGs to be successful, they have to win space in the retailers’ stores, which means “keeping the customer (retailer) happy.” That’s their operating model brand strategy and it applies to all FMCGs. Yet that’s where the similarity ends: as soon we peel back the layers of the union to find what’s underneath, we see very different ways that operating model brand strategy gets implemented.

The FMCGs operating models use two very distinct ways of getting their goods to market: warehouse delivery and direct store delivery (DSD). For both warehouse delivery and DSD, “keep the customer happy” is an effective operating model brand strategy, but one that takes very different forms when it comes to how the work is structured, and which elements are prioritized for successful strategy execution.

Warehouse delivery is the norm for the vast majority of products sold through retailers. Warehouse delivery minimizes labor cost needed throughout the system, adding together what is deployed by the FMCGs and the retailers. The FMCGs take responsibility for delivering their products to the back end of the retailers’ stores. The retailers then utilize their employees to merchandise the products on the shelves. The upside of warehouse delivery is minimized labor costs for the FMCGs. The downside is they cannot ensure their products are prioritized for consistent restocking on the store shelves, or whether their competitors’ products come first, including the retailers’ own private label brands.

For certain products, the FMCGs use DSD so they don’t cede control over merchandising to the retailers. Under DSD, they send their own employees “through the front door” to bring in the products, and merchandise them on the shelves. This is a much more expensive strategy because total labor costs are much higher. For the most part, DSD is economical only for impulse purchase products such as snack foods, sweets, sodas and alcohol.

Because the DSD delivery model is more labor intensive, the FMCGs charge higher markup over manufacturing costs for their DSD products than products that come through warehouse delivery. The retailers don’t like paying the higher markup but are willing to put up with it if the higher costs are recouped through greater sales that justify the added cost. For impulse purchase products, the higher labor costs are justified because the FMCGs’ employees make sure displays are strategically located in the store to drive higher sales, are merchandised to maximize impulse purchases, and are restocked frequently to minimize out-of-stocks. The retailer always has the threat of making the FMCG send their products through warehouse delivery, so the FMCGs ensure their products are constantly stocked, and drive enough additional sales through extra locations in the store to justify the higher delivery costs.

The leaders of impulse purchase FMCGs use the operating model brand strategy of “keep the customer happy” to get alignment around how to deploy their higher-labor-cost model to drive greater sales – ensuring the organization design, rewards, accountabilities, etc. are optimized to deliver the additional sales without driving costs through the roof. For warehouse delivery FMCG leaders, in contrast, “keep the customer happy” means prioritizing lower labor costs over risking out-of-stocks. If the people in their system jumped every time a key customer barked they would quickly go out of business. In contrast, “keep the customer happy” for DSD does mean jumping when the retailer barks, to ensure displays are maintained and restocked quickly.

Developing a compelling operating model brand strategy is hard

Keeping people focused on the right things is very difficult in a world where competition and business models are ever-evolving. Every organization suffers from tensions created by the operating model because there is no such thing as a perfect organization design, and because there are multiple competing strategic priorities.

WalMart’s value of “everyday low prices” is clear, but is accomplished through an extremely complex system that involves millions of people and thousands of stores, warehouses, and offices. As they have expanded from rural to more urban areas, the standard store footprint has been expanded to include Neighborhood Markets, which operate very differently from their classic store design. The recent push into internet commerce to compete with Amazon has required building new layers of organizational capability on top of the original organization design that focused only on superstores.

Each new organizational capability that is added onto the strategy increases complexity, making it harder for people to know what to focus on even while “everyday low prices” remains a true north for WalMart. In some cases, the new organizational capability points towards a different true north: online shopping for WalMart is related to everyday low prices, but brings with it a different true north, because the cost structure needed to support a pure brick-and-mortar retail strategy is always more expensive and complicated than what’s needed to support a hybrid brick-and-mortar plus online strategy. So now WalMart has at least two true norths for their operating model brand strategy: one is everyday low prices, the other a successful internet strategy.

Multiple operating model brand strategies

Developing a single unifying operating model brand strategy in the face of multi-dimensional organizational capabilities is challenging at best, and often impossible.

Under WalMart’s traditional superstore business model, the entire system is organized around customers doing the shopping for themselves inside the stores at peak times of day. This means shelves are restocked in the middle of the night to keep the aisles clear when customers are more likely to be in the store; minimal restocking is done during the day to keep the aisles free for customers to move around. The decisions around who works what roles and at what times of day are all focused on ensuring (a) shelves are stocked full when the store is full of customers, and (b) WalMart’s employees leave the aisles open for customers to do their own shopping, providing minimal interaction with customers unless the customer needs help finding something in the store.

Now that WalMart has added internet ordering and curbside pickup, an entirely new organizational capability has to be built within the same four walls of the superstore: the operating model brand strategy for internet ordering is very different from the traditional superstore operating model brand strategy. Providing internet ordering and curbside pickup means creating additional roles in the store, or expanding existing roles to include new job responsibilities: someone who previously did only fill-in merchandising of products on the shelves during the day might now have to also pick orders for internet customers.

The new task of picking internet orders puts WalMart’s employees in the aisles during the height of the shopping day, creating competition for space with the store’s customers who are doing their own shopping. In extreme cases, a booming internet order business could drive regular shoppers away, as the aisles fill with WalMart employees doing the order picking, making it harder for WalMart’s traditional in-store shoppers to make their way through the aisles – which could drive them to also do internet ordering, or go someplace else entirely.

Thus operating model success requires striking the right balance between the two options for customers shopping at WalMart. It also requires ensuring that every employee in the store knows those competing objectives and can help the store’s leadership team see where conflict is likely to arise. Armed with the right information in real time, leaders can decide how to resolve the conflicts quickly with minimal negative impacts on WalMart’s customer value proposition.

Every organization has competing strategic priorities like these, each one requiring its own operating model brand strategy. The key to improved strategy execution lies in clearly articulating the operating model brand strategies, and designing the organization around them, resolving the conflicts that arise at each level where the work is done: job, team, business unit, function, and end-to-end across complete business processes.

For a deeper dive into this topic and other operating model challenges, come join me Nov 5-7 in Boston for the Optimizing the Operating Model workshop, where I’ll be joined by Patrick McLaughlin (CHRO Frito-Lay/PepsiCo), Mary O’Hara (CHRO Blue Shield of California), and Vicki Walia (Chief Talent and Capability Officer, Prudential).

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