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Michael G Jacobides is a strategy professor at London Business School as well as the Lead Advisor of Evolution Ltd, a boutique advisory firm helping clients adjust to a shifting context. A leading expert on business ecosystems, value migration and how firms navigate shifting, digital environments, he is Academic Advisor to the BCG’s Henderson Institute and has recently been a Visiting Scholar at the New York Fed and Visiting Fellow at Cambridge. . During the IADS 64th General Assembly held in 2023, Jacobides addressed IADS member CEOs to discuss the reinvention of retail and department stores, the foundations and evolution of ecosystems, and how these can be harnessed by retail businesses.

Harnessing the ecosystem advantage to reinvent retail

Defining an ecosystem as “a collaborative structure of interdependent firms delivering an integrated customer value proposition”, the concept provides a crucial lens for comprehending the evolving landscape of retail. Department stores, as integral components of these ecosystems, face new challenges stemming from shifts in consumer behaviour. These challenges prompt a closer examination of how department stores can effectively navigate and harness the advantages presented by dynamic business ecosystems.

Department stores: then and now:

The rise of the department store defined modern retail as we know it today. It changed the retail ecosystem from prices that were determined by negotiations between the clerk and customers to fixed prices. Department stores were the natural business ecosystem orchestrators in retail and consumer goods. Department stores did two things:

• They created superadditivity (the total value created by the platforms is greater than the sum of the values created by its parts), meaning that putting multiple items together in the same place makes other items more valuable just by being in close proximity to each other.
• Secondly, department stores offered customers experiences that were unmatched by any individual brand or manufacturer thanks to economies of scale and experiential displays that drive customers to spend more.

However, the 21st century has proven to be challenging for department stores. This has resulted in a sector-wide decline. Physical stores are starting to lose their superadditivity advantage to online marketplaces. According to BCG, the expected channel share for the 2023 holiday share of wallet shifted a lot with online marketplaces representing 30%, mass market retail representing 21%, and department stores representing 12%. This wallet share has been spread out among the different generations with department stores expected to perform well only among Baby Boomers. On the other hand, GenZ and Millennials are more drawn to off-price or discount offers, direct-from-brand, and specialty retail. And GenX is split between online marketplaces, mass-market retail, and direct-from-brand. This means that department stores’ Baby Boomer clients are getting to the age where they either die or stop spending money as they no longer bring in an income.

Redefining the role department stores should play in the 21st-century retail environment

Redefining the role of department stores in the current day retail environment requires an understanding of the business ecosystem. It is important to tackle ways that a department store can evolve as an ecosystem as the productive generation shifts from Baby Boomers to newer generations. These can be understood by asking a couple of questions.

The first question to address is: How can department stores collaborate with and complement (as opposed to compete with or substitute) the emerging digital retail ecosystems? They need to use physical locations as a lever to redefine the double value proposition user experience for influencers, brands, and shoppers by connecting the physical and digital worlds. For example, influencers offer live-stream shopping, which is experience-rich but lacks physical touch. Department stores can become complementors to online influencers and offer them things like iconic physical locations to stream from and interactions with fans, for example, Harrods offers a special room where customers can enjoy a beautiful setting with mirrors, lamps and screens allowing them to follow livestreamed masterclasses done by influencers from across the planet, and try the products on the spot at the same time.

Department stores can also fill the gaps by providing access to a wider subscriber base, new experiences, and increased reasons to visit (a possibility that not all brands are fully aware of). Taking on partnerships like these will create new revenue streams and advance and reposition brands in ways that can benefit all involved.

The second question to address is: How can department stores create a hub for reinvention of the retail experience without breaking the bank? They can leverage favourable economics of having central locations and high reputation as an anchor and bring complementors to fund the development of experiments in a controlled way. Deciding boundaries for criteria for innovation inside and outside the ecosystem is crucial for maximizing benefits and minimizing downsides. For example, European energy provider, Enel, is using its installed base of 3 million lamp posts as an anchor point to expand product offerings and get partners on board by promoting smart city initiatives to develop its value. It is also interesting to note that by doing so, they also expand their base of possible partners, as in addition to private businesses, local authorities were happy to team up as they know some of the new services or features could benefit their voting base.

But does this mean that you need to have a cool and sexy brand in order to be successful in complemented services? Jacobides explains that it is not necessary, or even sufficient enough. Virgin is an example of a brand that has tried it and failed with their attempt to expand their mobile business into banking, finally taking a toll on both businesses. It is not only about having a cool brand, but you must also have something in terms of the value-add to the customers. WeWork is a good example of an ecosystem that lacked brand recognition that failed recently due to greed and not due to the failure of the idea. In fact, a strong brand is actually a reflection that you are doing something that people and consumers like. But you can also reinvent your brand in order to access a very different class of customers. Mercedes-Benz has done this by connecting with rappers in the United States to make their cars go from being seen as nothing special to the type of cars used by rappers in the music industry, appealing to a younger customer base.

Engaging and empowering legacy companies

Legacy businesses such as department stores are grounded in traditional ecosystems which might seem more difficult to reinvent and think outside of the box. To propel these entities forward, achieving organizational alignment becomes imperative for successful innovation. Deliberate attention is required to determine where innovation resides within the organizational structure, as this placement significantly influences its perception.

The innovation process design itself should be strategic and forward-thinking, taking into account the intricate dynamics among various departments and teams. When individuals feel integrated into something novel and inspiring, their receptivity to change is heightened. A straightforward narrative and a well-articulated rationale behind the proposed changes can cultivate a positive atmosphere, fostering enthusiasm and openness within the team.

Conclusion: Navigating business ecosystems for department store reinvention

In the ever-changing retail landscape, department stores face the imperative of reinvention, guided by insights from business ecosystems. Department stores, once retail pioneers, grapple with 21st-century challenges posed by shifting consumer behaviours and the fast emergence of online marketplaces, Jacobides explains. The posed questions — how to collaborate with digital ecosystems and create innovative hubs — signal a new era of adaptability and value proposition redefinition.

The cautionary tales of failed ventures drive home an important point: real success goes beyond just having a cool brand; it's about consistently giving customers something valuable and dynamic. Mercedes-Benz's brand reinvention, resonating with the music industry, can serve as inspiration for department stores seeking to connect with a discerning, younger clientele.

Engaging and empowering legacy companies calls for a deep commitment to organizational alignment and innovative thinking. Unveiling potential within traditional ecosystems requires a meticulous approach to innovation's placement and a forward-thinking design acknowledging team dynamics. The atmosphere fostered within these organizations becomes the catalyst for successful innovation.

In conclusion, the future of retail businesses hinges on the strategic navigation of business ecosystems, collaboration with emerging trends, and relentless innovation. By embracing these principles, department stores secure their survival and position themselves as pioneers in a continually evolving retail narrative. This transformative era invites exploration, reinvention, and enduring success.

Credits: IADS (Mary Jane Shea)