1 Compliments of 2nd IBM Limited Edition Business Analytics in Retail Learn to: Put knowledge into action to drive higher sales Use advanced analytics for better response Tailor consumer shopping experiences Integrate business functions to create efficiencies Jennifer LeClaire Danielle Dahlstrom Vivian Braun
3 Business Analytics in Retail 2nd IBM Limited Edition by Jennifer LeClaire, Danielle Dahlstrom, and Vivian Braun
4 Business Analytics in Retail For Dummies, 2nd IBM Limited Edition Published by John Wiley & Sons, Inc. 111 River St. Hoboken, NJ Copyright 2014 by John Wiley & Sons, Inc., Hoboken, New Jersey No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning or otherwise, except as permitted under Sections 107 or 108 of the 1976 United States Copyright Act, without the prior written permission of the Publisher. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) , fax (201) , or online at Trademarks: Wiley, For Dummies, the Dummies Man logo, The Dummies Way, Dummies.com, Making Everything Easier, and related trade dress are trademarks or registered trademarks of John Wiley & Sons, Inc. and/or its affiliates in the United States and other countries, and may not be used without written permission. IBM and the IBM logo are registered trademarks of International Business Machines Corporation. All other trademarks are the property of their respective owners. John Wiley & Sons, Inc., is not associated with any product or vendor mentioned in this book. LIMIT OF LIABILITY/DISCLAIMER OF WARRANTY: THE PUBLISHER AND THE AUTHOR MAKE NO REPRESENTATIONS OR WARRANTIES WITH RESPECT TO THE ACCURACY OR COMPLETENESS OF THE CONTENTS OF THIS WORK AND SPECIFICALLY DISCLAIM ALL WARRANTIES, INCLUDING WITHOUT LIMITATION WARRANTIES OF FITNESS FOR A PARTICULAR PURPOSE. NO WARRANTY MAY BE CREATED OR EXTENDED BY SALES OR PROMOTIONAL MATERIALS. THE ADVICE AND STRATEGIES CONTAINED HEREIN MAY NOT BE SUITABLE FOR EVERY SITUATION. THIS WORK IS SOLD WITH THE UNDERSTANDING THAT THE PUBLISHER IS NOT ENGAGED IN RENDERING LEGAL, ACCOUNTING, OR OTHER PROFESSIONAL SERVICES. IF PROFESSIONAL ASSISTANCE IS REQUIRED, THE SERVICES OF A COMPETENT PROFESSIONAL PERSON SHOULD BE SOUGHT. NEITHER THE PUBLISHER NOR THE AUTHOR SHALL BE LIABLE FOR DAMAGES ARISING HEREFROM. THE FACT THAT AN ORGANIZATION OR WEBSITE IS REFERRED TO IN THIS WORK AS A CITATION AND/OR A POTENTIAL SOURCE OF FURTHER INFORMATION DOES NOT MEAN THAT THE AUTHOR OR THE PUBLISHER ENDORSES THE INFORMATION THE ORGANIZATION OR WEBSITE MAY PROVIDE OR RECOMMENDATIONS IT MAY MAKE. FURTHER, READERS SHOULD BE AWARE THAT INTERNET WEBSITES LISTED IN THIS WORK MAY HAVE CHANGED OR DISAPPEARED BETWEEN WHEN THIS WORK WAS WRITTEN AND WHEN IT IS READ. For general information on our other products and services, or how to create a custom For Dummies book for your business or organization, please contact our Business Development Department in the U.S. at , contact or visit For information about licensing the For Dummies brand for products or services, contact ISBN: (pbk); ISBN: (ebk) Manufactured in the United States of America
5 Table of Contents Introduction... 1 About This Book... 1 Icons Used in This Book... 1 Beyond the Book... 2 Chapter 1: Understanding the New Consumer... 3 Retailing in the 21st Century... 4 Understanding the Characteristics of Modern Consumers... 5 Modern consumers are instrumented... 5 Modern consumers are interconnected... 6 Modern consumers are intelligent... 6 Adapting to the 21st Century Customer... 7 Chapter 2: Big Data Meets Business Analytics... 9 Harnessing Data: Variety, Volume, Velocity, and Veracity Identifying retail pain points Asking the critical questions Extracting meaning from the mountains Creating an interconnected organization Understanding the Business Analytics Pillars Business intelligence Advanced analytics Performance management The analytical decision management advantage...15 Making More Informed and Risk-Aware Decisions Making strategic decisions that set direction Gaining visibility to determine tactical decisions Using real-time information to make operational decisions Aligning Outcomes to Your Business Strategy Communicating the value of analytics Aligning around the point of impact Chapter 3: Marketing in a Consumer-Driven Era Understanding Consumer Buying Behavior and Trends Leveraging customer data Putting information in context Clicking with consumer communities... 23
6 iv Business Analytics in Retail For Dummies, 2nd IBM Limited Edition Keeping content in mind From personalization to commerce Looking at Unstructured Data: The New Age of Business Analytics The unstructured data challenge Recognizing the untapped analytics opportunity Customer-Driven Decision Making Content Analytics in Action Understanding Affinities between Products and Customers Advanced affinity analysis Market basket analysis Understanding customer preferences Anticipating the customer s next move Improving Retail Promotions Chapter 4: Making Smart Merchandising Decisions Enabling Merchandising Efficiencies Reconciling Top-Down and Bottom-Up Plans Developing dynamic retail assortments Aligning store-level assortment with demand Creating a Demand-Driven Supply Chain Leveraging Proven Technology Chapter 5: Overcoming Supply Chain Challenges Gaining Visibility across the Supply Chain Resolving Operations Problems Before They Arise Collaborating with Vendors Chapter 6: Managing Your Brand to Drive Loyalty Building Brand Loyalty in a Digital Age Overcoming Brand Loyalty Building Challenges Making Sense of the Data Explosion Meeting the Needs of Empowered Consumers The rise of mobile commerce Realizing ROI on marketing dollars Building trust with consumers Chapter 7: Managing Store Performance Integrating Stores in the Planning Process Identifying ineffective processes Identifying ineffective technologies Discovering a pattern for success Driving better P&L analyses Managing Incentive Compensation... 50
7 Table of Contents v Chapter 8: Tapping HR as a Strategic Resource Using Analytics to Optimize Staffing Plans Drilling into HR analytics Challenges to implementing analytics remain Determining HR Analytics Signposts Defining the necessary knowledge Evaluating workforce performance Retaining valuable talent Addressing Strategic Human Capital Challenges Determining HR strategies Understanding collaboration and knowledge sharing Putting Your Plans into Action Chapter 9: Generating Revenue Growth Radically Transforming Planning Cycles Designing Practices for Results Analysis Keeping Tabs on KPIs Increasing Overall Performance Chapter 10: Partnering with IT Getting the Foundation Right for Business Analytics Moving Fast on Actionable Insights Business and IT Jointly Delivering Continuous Improvement... 65
8 Publisher s Acknowledgments We re proud of this book and of the people who worked on it. For details on how to create a custom For Dummies book for your business or organization, contact or visit For details on licensing the For Dummies brand for products or services, contact Some of the people who helped bring this book to market include the following: Acquisitions, Editorial, and Vertical Websites Project Editor: Carrie A. Johnson Acquisitions Editor: Connie Santisteban Editorial Manager: Rev Mengle Business Development Representative: Sue Blessing Custom Publishing Project Specialist: Michael Sullivan
9 Introduction Data is the key that unlocks greater sales potential for retailers but the truth is you may be overwhelmed with so much data that it can seem impossible to make sense (much less value) of continuous information streams. This book offers principles and tools you can use to discover how your customers behave and how to put that knowledge into action to drive more sales. About This Book Business Analytics isn t a new concept, but new technologies and capabilities have emerged that make it possible for average business users from finance to marketing to merchandising and beyond to analyze and understand a plethora of data. If you re looking to find out how to tap into the power of these technologies to discover insights that, when acted on, drive revenue growth and improve customer relations, this book is for you. If you work for a consumer product manufacturer that wants to improve the go-to-market strategy by better understanding consumer behavior or simply wants to achieve great efficiencies, this book is also for you. Welcome to Business Analytics in Retail For Dummies, 2nd IBM Limited Edition! Icons Used in This Book Every For Dummies book has small illustrations, called icons, sprinkled throughout the margins. These tiny images call special attention to text for one reason or another. Following are the icons used in this book.
10 2 Business Analytics in Retail For Dummies, 2nd IBM Limited Edition The Remember icon highlights points to keep in mind as you immerse yourself in the world of Business Analytics. Right-on-target information you can use to help make the most of any investment in Business Analytics is next to this bull s-eye. The Warning icon does just that warns. It helps you avoid common mistakes, misconceptions, myths, and pitfalls. Be sure to look for it so you don t do more harm than good as you wade through the world of Business Analytics. Beyond the Book We recognize that we can t cover every last detail about Business Analytics in this book, so if you want to discover more in-depth information in white papers or case studies, check out www-01.ibm.com/software/analytics/retail. Hopefully, this helps you further understand how other retailers have tackled the challenges that you face. Or you can visit the URL just for information on events, where to go for assistance, and what useful tips are out there for you.
11 Chapter 1 Understanding the New Consumer In This Chapter Looking at retailing in the 21st century Understanding and adapting to the characteristics of modern consumers Do you really know your customers? Do you know who they are? Do you know how likely they are to buy your products or services? Do you know where they shop and how they shop? Would you like to know? Retailers who know their customers and apply what they know about their customers preferences are finding a competitive advantage in the marketplace. Customers leave footprints whether they actually make a purchase or not. Those footprints are created when customers and potential customers browse your website, perform mobile searches, answer surveys, question your staff, contact your call center, and, of course, make purchases. Those footprints leave clues about who your customers are, who influences them, what they re buying, how often and where they shop, and much more. Much like a detective relies on his trusted evidence collection kit to solve a case, you can use Business Analytics to gather customer clues that demystify shopping preferences, and apply those clues to draw insight and reach conclusions. Business Analytics includes the technologies and applications that allow organizations to mine data to glean insights that improve decision making. Indeed, with a clear picture of your customers, you can develop and deliver a complete offering that consistently reflects back to them as they engage with your business what they ve told you they want from you, the retailer.
12 4 Business Analytics in Retail For Dummies, 2nd IBM Limited Edition In this chapter, you familiarize yourself with the challenges of retailing in the 21st century, the characteristics of modern consumers, and how to adapt your business model accordingly. Retailing in the 21st Century Digital communication is the new norm for most 21st century consumers. This reality along with the speed of technological innovation and the various types, volume, and speed of consumer data created today are impacting every industry but few are feeling the effects more than the retail industry. Think about it for a minute. There s a social media platform to suit every niche. Online product reviews and recommendations are the new word of mouth marketing, with much greater reach. Mobile devices are more pervasive than ever before in history, spanning geographies, social status, and demographics. New purchasing channels continue emerging and consumers are more empowered and informed about their choices. The result is increased complexity for retailers to accurately understand customer behavior and purchase patterns, develop meaningful customer segments, predict demand, optimize delivery, protect margins, and drive profitability. Making matters more complex, consumers are demanding a seamless experience from the retailer, regardless of touch point, what they need, or how they re shopping. That makes customer attainment, retention, and growth more critical yet more complicated. So, what s the 21st century retailer to do in this game of survival of the fittest? Adapt. Indeed, the retailers who best adapt to the current consumer-driven landscape are the retailers who build loyalty and drive the strongest results.
13 Chapter 1: Understanding the New Consumer 5 Understanding the Characteristics of Modern Consumers The IBM Institute for Business Value has identified three characteristics of 21st century consumers. You take a look at these characteristics in this section. Modern consumers are instrumented With the Internet, mobile devices, in-store technologies such as tablets, and public kiosks among other continuously emerging new technology as well as traditional marketing media consumers have instant access to a wealth of information about retailers and their products. Consumers are actively using this information to decide what to buy, where to buy, what price to pay, and what payment method to use. Consumers can shop with a few mouse clicks through comparison shopping engines or through online retailers that carry the same product from several vendors. Younger consumers, particularly Millenials and Generation X, are especially quick to embrace new technologies to enhance their individual shopping experience. Consumers living in emerging markets are even more enthusiastic about tapping technology for e-commerce because it opens a world of shopping choices that were previously unavailable due to economic conditions or logistics. As a matter of fact, more than 500 million mobile devices are in use that are owned by individuals who don t have electricity in their homes and rely on solar power or village charging stations. Despite this reality, focus can t completely shift from brick and mortar to digital formats. Keep in mind that consumers use mobile devices for retail purposes that range from finding stores to checking prices and inventory to subscribing to promotional offers. At the end of the day, brick-and-mortar stores are still the instrumented consumer s primary purchase channel.
14 6 Business Analytics in Retail For Dummies, 2nd IBM Limited Edition Modern consumers are interconnected The ways consumers learn about retailers and products have radically changed. Once upon a time, retailers were the primary source of information about their stores and goods. Now, consumers rely surprisingly little on retailers for input. That s because millions of people around the world are interconnected via social networking sites and read customer comments and product reviews online. In other words, consumers are listening more to other consumers than they are to retailers. Consumers are influencing purchase decisions of other consumers they don t even know and sometimes that sway is happening on a retailer s own social network. One-third of the consumers IBM polled are likely to follow a retailer on a social network, chiefly to try new products and get preferred customer status. But these same consumers will rely on other consumers for information about product satisfaction. This phenomenon will only grow in the years ahead. The world s population is expected to grow around 12 percent over the next decade, according to United Nations census data. More people are now living in cities than rural areas, and half of the emerging world s population is considered middle class by their country s standards. The result is a larger pool of more prosperous, more diverse, more technology-savvy, and more demanding consumers. Modern consumers are intelligent Consumers are not only becoming more instrumented and interconnected, but also they re intelligent about how to embrace technology for smarter shopping. Today s consumers have clear ideas about what they want and what they expect from retailers. In its consumer study, IBM used Max Diff analysis, where respondents compare different attributes just as they do when shopping in real life, to identify what matters most when deciding where to shop and where they think retailers most need to improve. IBM discovered that consumers believe retailers should focus on offering better promotions and
15 Chapter 1: Understanding the New Consumer 7 prices, and making product improvements. More specifically, consumers want personalized discounts and consistently available products, followed by better value, quality, and variety. Nearly two-thirds of consumers also said that they would spend more money with a retailer if that retailer made the improvements they suggested and offered a personalized brand experience. Adapting to the 21st Century Customer In the game of survival of the fittest, the 21st century retailer needs to adapt. Indeed, the retailers who best adapt to the current digital media-driven landscape are the retailers who drive the strongest results, quarter after quarter after quarter. To deal with the challenges and opportunities of the modern retail world, savvy retailers are turning to Business Analytics. Business Analytics isn t an ancient theory executed by statisticians; it s a necessary business tool that s applicable to all decision makers in the organization to meet the needs of customers and increase their loyalty. Business Analytics helps retailers adapt to this new breed of consumers in these ways: Analyzing customer behavior, buying patterns, and sentiment and responding to their individual needs Delivering personalized promotions for the right products at the right time and in the customer s preferred method in order to motivate purchases Accurately predicting demand in order to optimize assortment, protect margins, and drive profitability Understanding top customers, how to retain and grow them, and how to develop additional customers Creating a brand experience to build customer loyalty, taking into account the omni-channel approach of many customers who want to leverage all channels on their shopper journeys Gathering information about and analyzing influencers of your customers and understanding how they impact your customers purchasing decisions
16 8 Business Analytics in Retail For Dummies, 2nd IBM Limited Edition These new retail realities are not only changing the way retailers conduct business, but also they re significantly impacting the way retail organizations are structured and where investments are targeted. For example, running channels in silos is more costly for retailers, and it fails to address the needs of the omni-channel customer who wants a consistent and cohesive brand experience whether he researches or shops online, in a store, at a kiosk, over the phone, or by using a mobile device. Presenting a unified brand experience to the customer depends on alignment of the customer strategy and access to the right information across the entire retail organization. This can be a challenge, but it s one that pays significant dividends. Indeed, this investment in organizational alignment is critical in the customer s path to purchase and ultimately builds customer loyalty while staying true to the overarching corporate strategy.
17 Chapter 2 Big Data Meets Business Analytics In This Chapter Harnessing the power of information Understanding the components of Business Analytics Coming to informed and risk-aware decisions Aligning business strategies to outcomes Imagine harnessing the power of information to create a demand-driven merchandising and supply chain, reduce costs, and drive operational excellence to new heights to deliver a shopping experience that outdoes your competitors. Business Analytics makes that possible. In this fast-paced information age, the need to effectively manage and understand information has never been more vital. Retail has always had a lot of data (just think transaction logs), but now Big Data is entering the scene. An explosion of customer and business information, in a variety of forms, is creating countless challenges for retailers. Consumers are more connected, more empowered, and more demanding, and they can choose where, how, and when they want to shop. It s truly a buyer s market. Forward-thinking retail organizations armed with access to this data, and who are able to translate that data into actionable insights, are turning these challenges into profitable opportunities and building customer loyalty. Call it an information-led transformation. This change in thinking and approach to data and insight give retailers the ability to better understand history and what s happening today to predict future trends.
18 10 Business Analytics in Retail For Dummies, 2nd IBM Limited Edition In this chapter, you discover how to harness your data to identify the pain points that could be impacting your growth and how to extract key information from your data to soothe those pains. You also learn how to make the case for Business Analytics in your organization and begin to align your business strategy to desirable outcomes. Harnessing Data: Variety, Volume, Velocity, and Veracity Data is being generated at a rate never before seen in history. Retailers are working to collect, organize, and leverage that data appropriately to gain insights that can drive actions and decisions leading to greater customer satisfaction and loyalty, and ultimately impacting bottom-line profits. Business Analytics makes that data capture, translation, and next best action possible. The current digitization of virtually everything creates new types of large and real-time data across a broad range of industries. As this book is being written, people are creating 2.5 quintillion bytes of data daily across the globe, with 17 terabytes coming from Facebook and Twitter alone. Consider the implications of this statistic: Ninety percent of the data in the world today has been created in the last two years and there are no signs that data creation is going to slow. In fact, the volume and speed at which data is being created will bring new challenges to retailers in the years ahead. Making matters more difficult, much of the data is in non-traditional and unstructured forms. Organizations struggle to establish the accuracy of much of the data, so they need to combine and measure data across multiple sources to create a more accurate and useful data point. These facts are sparking questions about how to best capture the data and how insights derived from that data impact a retailer s strategy. The answer for many retailers is to tap into the advantages of advanced analytics technologies and strategies to extract insights that help retain existing customers and attract new ones. Business Analytics capabilities create new opportunities for retailers to meet the needs of their consumers and create a competitive edge in the marketplace.
19 Chapter 2: Big Data Meets Business Analytics 11 Identifying retail pain points Before you can harness the power of information, you first need to understand the specific problems you hope your data insights will solve. The overarching challenge for many retailers is to cost efficiently provide a seamless, omni-channel shopping experience an experience geared toward consumers who interact with your brand online, in a store, over the phone, by using a mobile device, at a kiosk, from a catalog, or all the above to your customers. Your goal is to provide the right product, at the right price, in the right place, and at the right time. But many obstacles are in your path. When you drill down into this challenge, for example, you have to determine what consumers want and work the dynamics of supply and demand to deliver on those expectations in real time. Ultimately, you need the best tools available to win customer and brand loyalty, while avoiding unnecessary costs. Asking the critical questions Every day, retailers are taking steps to increase their efficiency, improve their customer experiences, and develop smarter retailing strategies. Retailers who don t enter this race will be left behind. To find out if your organization is working smarter in retail, start by asking some critical questions: To what extent do your employees have access to the information they need at the time and place they need it? With which suppliers have you moved beyond cooperation to constructive collaboration? Which of your operational processes are able to adapt and respond quickly to changing marketplace demands? How much value are you getting out of the information stored across your organization? How much external information do you leverage in your strategy and decision making? How well do you know your customers preferences?
20 12 Business Analytics in Retail For Dummies, 2nd IBM Limited Edition Extracting meaning from the mountains Data pours in from multiple systems, channels, and regions around the clock. The challenge is how to consolidate, organize, and extract meaning from the various data sources to inform decision making and enable productivity and agility in the face of multi-faceted market demands. Business Analytics has the keys you need to unlock the mysteries hidden deep within your data and empowers your organization to spot trends and discover underlying causes and issues. Today s Business Analytics tools offer flexible, user-friendly reporting, analysis, modeling, predictive, and planning capabilities that make it possible for everyone in your organization to tap into the information they need to make informed decisions across all departments, locations, functions, and roles. Creating an interconnected organization As you extract meaningful information from the mountains of data you collect, it s vital to make sure the various stakeholders in all departments in your retail organization understand how to take action on that data and how those actions impact other parts of the organization. Business Analytics software enables you to tailor the information to each individual s role for security purposes and to avoid information overload. Industry leaders are distinguished by their ability to leverage all information, all people, all perspectives, and all decisions at the point of impact. The aligned and insight-driven retailer has the opportunity to improve performance in areas critical to the organization: Creating a smarter shopping experience means that the retailer uses insight into consumer behavior and purchase patterns to provide a personalized path to purchase perceived as valuable to consumers and thereby increases customer advocacy and brand loyalty.
21 Chapter 2: Big Data Meets Business Analytics 13 Building smarter merchandising and supply networks helps the retailer provide the right merchandise in the right place at the right time for the right price. That maximizes revenues, minimizes stockouts and markdowns, and protects margin. Driving smarter operations allows the retailer to improve planning and be more agile in the dynamic retail environment. Keeping stores, labor, assets, and business processes aligned around strategic initiatives and corporate Key Performance Indicators (KPIs) detailed specifications used to track business objectives creates an environment of visibility, accountability, and collaboration. Understanding the Business Analytics Pillars Business Analytics is a broad set of technologies and practices used to understand and enhance business performance. In this section, you take a look at the pillars of Business Analytics. Business intelligence Business Intelligence (BI) includes the concepts, methods, and technologies that gather and analyze data to drive better decision making. BI has been around since 1958, when IBM researcher Hans Peter Luhn first used the term. Decades later, technologies are available that have made BI a mainstream business function. BI uses querying, reporting, analysis, scorecards, and dashboards to make it easier for business users across the organization to find, analyze, and share the information they need to improve decision making. Visualization, ad-hoc functionality, mobility, drill-down, and drill-through are just some of the capabilities that allow users to understand the current state of business and why they re experiencing a certain level of performance.
22 14 Business Analytics in Retail For Dummies, 2nd IBM Limited Edition BI has come a long way, and capabilities continue to evolve, offering deeper insights that can be applied across the organization by any user. Without this evolution, organizations wouldn t be able to cope in this world of Big Data. With modernday BI, business users across marketing, merchandising, finance, supply chain, and so on can easily access and consume data relevant to their roles. Advanced analytics Advanced Analytics (AA) leverges historical, current, and future possibilities to help retailers see potential results if certain decisions are made and executed. AA includes data mining, predictive modeling, what-if simulation, statistics, and text analytics to identify meaningful patterns and correlations in data sets to predict future events and assess the attractiveness of various courses of action. Algorithms automatically find significant patterns, and models learn from past data and update predictions for current or new business questions. With AA, retailers move from foundational reporting to differentiating and breakaway capabilities, leading to a significant competitive advantage. AA allows the retailer to predict a consumer s response to an offer and use that result to draw conclusions about financial performance, supply chain requirements, and operational needs. AA is game-changing for retail organizations as they generate greater results and efficiencies with better information and insights into predictions about future outcomes. It allows them to become prescriptive through targeted offers and other incentives to encourage certain consumer behavior and interaction. Performance management Business Analytics is rounded out by capabilities in Performance Management (PM), which allows for simplified, structured, automated, and dynamic modeling to understand the implications of various scenarios. BI and AA drive the input to what-if planning in PM. PM gives the business the flexibility to build best-case and worst-case scenarios; for example, modeling outcomes of changes in demand, then pushing those scenarios through to merchandising and operations to get a full picture of