To maintain a competitive edge, firms must embrace a paradigm shift—from making services central to their value proposition, to making experience the center of their value proposition
About ten years ago in Prague, the capital city of the Czech Republic, the drab and grumpy Kaufland stores, a German-headquartered discount grocer, were transformed.
Entryways were made open and inviting. Stronger light and wider aisles cheered up interiors. At the back of stores, bakeries filled the air with the smell of fresh baked bread while a deli livened things up with the colors of stuffed red peppers, orange cheeses, and an array of salads. Even the staff changed. Smiles and jokes replaced frowns and shrugs among floor stockers and cashiers.
Make no mistake, Kaufland is still a discount grocer. Weekly coupon books still appear in mailboxes, pallets occupy the main aisles, and many goods sit in shipping boxes that have been cut open and left on shelves. But management understood that they had to do something different to compete in the price-conscious Czech market. Discounters such as Penny Market were also ramping up service with “modern bakeries” of their own while no-frills chains such as Norma increased operations in densely populated urban areas.
In short, traditional sources of differentiation—volume and low prices—were no longer sufficient to keep competition at bay. Kaufland’s management recognized this, and that business environment is currently undergoing a shift in the fundamental driver of economic value: from the Service Economy to the Experience Economy.
Such shifts are nothing new. The shift from an Agrarian Economy to the Industrial Economy in the 18th Century was followed by the shift to the Service Economy in the latter half of the 20th Century, with financial firms, telcos, retailers, restaurant and hotel chains, airlines, resorts, and real estate agencies all coming into their own. Firms that recognized this shift too late were marginalized. New firms that capitalized on this disruptive shift in economic value prospered, with a few incumbents (think IBM and its shift from hardware to services) managing to successfully navigate from a Goods-driven Economy to the Services-driven Economy.
The current shift is characterized by service-based industries becoming commoditized. Some, such as banking and telecoms, are commoditizing faster than others. Companies that have recognized this shift within their industries have prospered—think Apple, Starbucks, and Amazon. Meanwhile firms that have remained complacent face rising competitive pressures, as low cost alternatives—such as low cost airlines and no-frills mobile virtual network operators—drive down prices and profitability.
To maintain a competitive edge, firms must embrace a paradigm shift—from making services central to their value proposition, to making experience the center of their value proposition. While the current imperative to change is primarily impacting B2C firms (see below), some B2B firms are starting to implement programs to differentiate themselves from their competitors.
Digitization of business and industry is also enabling change. The increased adoption of high-speed Internet, smartphones, and the rise of digital startups with disruptive business models is creating competition in traditional goods and services industries from players in previously unrelated industries. Some of the first goods and services industries to see this disruption were the newspaper, music, movies, travel, and book publishing industries as content was digitized and moved online. More recent industries seeing this disruption are the banking, telecom, taxi, and the automotive industries. And now even brick-and-mortar grocers are feeling the pinch from click-and-collect and delivery services from online sellers.
Finally, digitization is also increasing customer buying power. Customers today have multiple sources of information to evaluate brands and products, from social media to online peer reviews. Brands no longer have a monopoly on the information that customers have about their own products and services. Customer loyalty to a brand is thus becoming increasingly transitory as customers easily abandon a product with which they have had a bad experience, often going online to inform others about it.
Essentially, business can no longer rely on the one or two elements they once used to differentiate themselves. That is, it is not enough to be a discount airline or no-frills bank because, by both chance and design, there is or soon will be another discount airline or no-frills bank that will have a better experience.
Certainly Kaufland (and its parent company, the Schwarz Group) understands this, which is one of the reasons it has been so successful. Sure it still has more work to do, as new threats are lurking. Mid-level grocers in the Czech Republic and surrounding countries have started experimenting with online shopping. Though just getting started, early signs suggest it will take off in Central Europe just as it has in the UK, where customers value not just the time-saved but also the overall experience.
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