What Does It Take to Succeed in Retail? Ask Arthur RubinfeldPublished: September 21, 2005 in Knowledge@Wharton
When Arthur Rubinfeld joined Starbucks, the company had some 100 stores in the U.S. As executive vice president, he presided over an expansion that saw this number rise to more than 3,800 stores worldwide. In 2002, after leaving Starbucks, Rubinfeld founded Airvision, a Seattle-based consulting firm which works on "integrated brand positioning, retail design, strategy, and operations." Its clients include such companies as Gateway, Adidas, and Washington Mutual. Rubinfeld's book, Built for Growth: Expanding Your Business Around the Corner or Across the Globe, was recently published by Wharton School Publishing. His co-author is Collins Hemingway - who was co-author, with Bill Gates, of Business @ the Speed of Thought.
In their introduction, Rubinfeld and Hemingway characterize Built for Growth as taking "a holistic approach to retail development, combining theory and practical ideas to cover the entire scope of what it takes to succeed in retail." The authors say the book strives to demonstrate "how to combine core personal and company values with your business expertise to create a meaningful brand." Among the other topics they tackle are: how to craft a retail presence to develop customer loyalty; how to identify the best retail locations; how to build a management team, organization, and systems - whether you want to have one store or 1,000; and how to innovate and renew your brand. Rubinfeld weaves his experiences at Starbucks - as well as work with other major brands - throughout the book.
Knowledge@Wharton: You start the book with a discussion of values, both personal and corporate. You cite the use of the phrase "to be profitable" in a company's mission statement as "a red flag" and an indication of its lack of focus. Isn't being profitable, being able to survive and move the company forward, a prerequisite to any other goal?
Rubinfeld: Being profitable is necessary but not sufficient. We devote an entire chapter in Built for Growth to help retailers ensure that they have a profitable model. But profit cannot be your primary mission. None of the most successful companies in the world have profitability in their mission statements. They understand that profits are the proper result of executing on the mission. Too much focus on profits also can lead to short-term decision-making, as all the recent corporate scandals have shown. The landscape is littered with companies that have being profitable as their No. 1 priority. If money is your motivation, where will you find the passion to drive for excellence or stay with your concept during the hard early years? If money is your motivation, how will you even begin to get your head around the need to become unique? It's a different universe of thought entirely. A company focused primarily on profits likely will fail to focus on creating and sustaining unique core values that make it different and therefore more competitive.
Knowledge@Wharton: One of your recurring themes is the importance of quality. Overall, do you see American retailers gaining or losing ground in that area?
Rubinfeld: Generally, gaining. Good retailers learn best-in-class practices from other operators to improve merchandising and supply chain management. They are using technology for faster inventory infill. The price/value retailers are continuing to improve quality and hold down prices, which is forcing the middle and upper tiers of retailing to improve quality as well as remain differentiated. If you can buy a cool, personally designed teakettle at Target, then the custom gift shop has to continue to improve its offerings, to locate and obtain ever-newer products to keep ahead of the mass merchants.
Knowledge@Wharton: You write that inner city neighborhoods represent one of the best opportunities for companies looking to increase retail sales. Do you see this as a way of using markets and market forces to address social ills?
Rubinfeld: Absolutely. Inner-city stores provide jobs to local residents within their community. The jobs give people hope and the operating stores are more convenient and improve the aesthetics of the neighborhood which encourages others to invest locally. The higher standard of living created by more employment encourages increased spending and thus more retailing opportunities. There are other positive changes, some subtle but important. Instead of people having to spend over an hour commuting on public transportation to get to work, they can spend more time closer to home helping their children with their homework or being active within their community.
Your question implies, of course, that the only reason to go into the inner city is for altruistic purposes. The inner city is a great market, period. Starbucks, Washington Mutual, and other companies that have gone in have had very good financial results. Stores are maintaining the chain average in sales or even doing better. I saw another statistic recently from a nonprofit group that says 364 companies that have gone into distressed inner-city neighborhoods have seen extraordinary growth, an average of 866% in the five most recent years. The results stem from an eager and willing work force, generally good municipal services, and proximity to highways, airports, and nearby wealthy markets. Inner-city retailing is good for the community, and it's good for the retailer.
Knowledge@Wharton: Management psychology is a recurring theme in your book. You write about reinforcing consumer behavior in a discussion of store layout and you also cite a run-in with an airline, where it refused to let you and your wife upgrade to use empty seats in first class. It strikes me that there is an ego issue there; in the latter case, the airline, or airline management, didn't want to let the line people or the customers have power to make decisions. Is that a classic place for management to trip up -- being in charge versus over-managing?
Rubinfeld: Companies need to distinguish when top managers need to be in charge versus when they need to empower their employees to make decisions. Airlines need to have central decision making over things such as flight schedules and security. But they need to empower people to make decisions when they can make life easier for customers. When customers arrive at an airline counter, they often have unique travel needs. They are under a lot of stress. Travelers need to get someplace on time, and they are tired. They are relying on the transportation network. Companies that are involved with one-to-one contact should train people to make positive decisions for customers in such situations whenever possible. This is exactly what JetBlue is doing to win customer loyalty. You feel you are talking to a human being, not a robot.
Knowledge@Wharton: You also seem to focus on balancing security in one's abilities with a willingness to concede ignorance. How does one decide when to boldly make decisions and when to be willing to cede authority to subordinates?
Rubinfeld: Long before any decision comes up, a good manager is already sending out constant pulses and testing the situation to see how a subordinate performs. When dealing with an issue or a problem with a subordinate or colleague in the moment, a good manager has already picked up on whether the person is ready, able, and willing to take on the responsibility for the decision. Like a good parent, you let out a little leash and see how the person performs. If they do poorly, you know their limit. If they do well, you encourage them to take on more responsibility. Over time, you have a good feel for the person's decision making capabilities based on their performance to date.
Knowledge@Wharton: You note that every Starbucks employee starts out as a barista (and every Toyota employee starts out on the line). Is resistance to this kind of strategy -- similar perhaps to pro-immigration advocates arguing that "there are jobs Americans won't take anymore" - a soft spot in American management?
Rubinfeld: No, it is not. The people who are taking the jobs that Americans are unwilling to take are doing so out of necessity. We're talking about all employees at all levels being willing to learn every aspect of the business. Good managers want to get under every piece of the company. I recently invested in a baking company, and I go out on the trucks to see what's going on in the field. Sam Walton used to ride the trucks at Wal-Mart, picking the truckers' brains, because they were the only people who saw more stores each week than he did. Managers who are not willing to get their hands dirty won't move up in the organization.
Knowledge@Wharton: One of the points you make about bringing out a new brand or a new concept is that an entrepreneur has to be able to coldly assess why his or her idea is solid enough, different enough, new enough to be able to grab market share from existing enterprises. How does one balance the enthusiasm one needs for a new brand with the cold assessment one needs to really know if the brand will have legs?
Rubinfeld: Balancing enthusiasm and reality is one of the hardest things for a retailer to do. The emotional response is a very powerful driver. When you get excited about something you are doing, you are reinforcing your own ego. One step is to develop a solid strategic plan with rational go/no-go decision points. Another is to do a great job analyzing the financials. Finally, you must seek out mentors to obtain outside opinions that can bring you back to reality. From the beginning, you should design a program about whom to talk to, when to talk to them, and what kind of feedback you're looking for. It's important to find someone who you know will be brutally frank. Some people are so kind they don't want to spoil your enthusiasm, or they don't want to diminish the drive, so they won't be honest. You need to know that whoever you ask for feedback is going to be honest.
Knowledge@Wharton: You refer to winning the hearts and minds of consumers and creating "disciples of the brand." Is marketing essentially propaganda?
Rubinfeld: Not propaganda in the sense of spreading false information. Successful marketing positively presents product attributes by tying it to lifestyle, function and the needs of the consumer. It's not "spin" if you're telling the truth. Sometimes, the same company uses the same approach to marketing over and over again, or many companies use the same approach, so the repetition may make something feel like propaganda. To the extent that any one marketing vehicle overwhelms the consumer, the message may feel like propaganda. It's up to companies to constantly seek fresh vehicles.
Knowledge@Wharton: You cite a "hub and spoke" strategy as a good way to pursue rapid but sustainable expansion into new regions: Dominate an area, then move outward from there. To what degree do you feel entrepreneurs might benefit from studying military tactics as well as business theory?
Rubinfeld: Entrepreneurs will definitely benefit from understanding the military approach to things. Anyone can benefit from reading Sun-Tzu's analysis of strategy or from von Clausewitz's notion of massing forces. Probably the most important thing is that military planners constantly do what-if analysis, do backup plans. They constantly think about what would happen if this or that attack went badly. Their mindset is to constantly move forward, to keep the other guy retreating. That preparation, that constant state of alert, that desire to always be moving -- all these have many parallels in business.
On the other hand, you need to be careful not to get too focused on the competition. Do you remember when Lotus would introduce three new spreadsheet features and Microsoft would retaliate with five new features, and suddenly you had 20 new features that nobody could figure out how to use? Two competitors got so focused on each other that they forgot to do something the customer needed. Responding strictly to what the competitor is doing can also lead to what we call the "99-cent burger wars," where everyone converges on the same features and the only differentiation is price. That's a losing strategy. So many analogies exist between business and the military in planning and tactics, but there are differences too.
Knowledge@Wharton: As Starbucks has expanded abroad, how has it decided what to keep consistent (as part of its global brand identity) and what to change, in order to connect with local tastes and preferences? Does it have a "template" of things to keep constant, with elements within it that are variable from one geographic location to another?
Rubinfeld: Starbucks has a familiar kit-of-parts design presentation with general operational approach and back-office systems with every store. The close identification of cultural differences in each country forces Starbucks to make some operational changes. In different countries, customers have different behaviors in purchasing. Probably the major difference, however, is the food offerings. They vary considerably from country to country. The company will vary the menu items in whatever way it needs to please the customer.
Knowledge@Wharton: The book focuses on retail brands. On the manufacturing side, the U.S. has been having increasing trouble competing with other countries, with China at the top of the list. Are there strategies that American companies can use to maintain domestic manufacturing operations or is the shift overseas simply an inevitable function of comparative advantage?
Rubinfeld: This is a tough question. In some ways, the U.S. is to China today as Britain was to the U.S. in the middle of the last century. Social costs and wages in Britain became too high for many markets to stay competitive. China and other countries today simply have much lower base costs because of our higher standard of living. The typical Chinese worker may make $60 a month. Customer service operators make $240 overseas vs. $1,600 a month in the U.S.