Nordstrom Is In the Right Blue Sea: They Can Enhance Profitability – And Even Grow Revenue Slightly

Use a Value Strategy – Similar To Big Box Retailers
An example of executing and enacting a value strategy is to borrow a tactic from big box stores such as Costco and Sam’s Club – do a value-oriented store-within-a-store. To make this work effectively, they must keep the customer experience the same within this new entity. The key ingredients of this strategy are maintenance of high quality experience and fashionable new items – but at a moderate price point. It must be positioned above Target but below Neiman Marcus. To pull this off, Nordstrom would have to develop or enhance a set of private label lines that are higher than Target in “fashionability” and quality. To prevent cannibalization of sales from higher-end parts of the main store, the buyers must choose merchandise which is distinctive and does not directly compete with other merchandise within the main store.

Revenue Portfolio: “Real Stars”, “Potential Stars”, and “Cash Cows”
Nordstrom should also look to increase the number of its Nordstrom Rack Stores which offer discounted and discontinued merchandise. Its sales are increasing, and the Rack Stores’ lower-priced merchandise is allowing it to weather the recession well. The Rack Stores are “stars” within Nordstrom’s portfolio of revenue-generating entities – they are growing and kicking off substantial cash flow. Capital expenditures for “real stars” should increase, but for “potential stars” – good growth rates but less cash flow – hold off increases in funding until 2010. Nordstrom should focus capital allocation more to its “cash cows” – areas which are kicking off substantial cash flow but not necessarily growing rapidly.

Focus On Value – But Keep-Up Differentiation Qualities
Nordstrom’s profits are down and growth is receding – but so is everyone else in retail – they shouldn’t feel badly! Even in this adverse retail climate, Nordstrom can raise profitability and achieve some growth. Unlike many competitors, they are still profitable, and have kept their loyal core customers. With chains positioned below them, like Target adjusting its focus to value over “fashionability,” Nordstrom should follow this trend in the market – but maintain its value proposition and differentiating qualities. This article has revealed the Blue Ocean strategy for accomplishing this. Nordstrom’s current tagline should read: “Our Value: Great Fashions and Legendary Service without Breaking You.”

Blue Ocean Strategy and Retail: Nordstrom Gearing Up To Navigate an Expected Turbulent Holiday Season

Current Difficult Times for Nordstrom and Retailers
Nordstrom is a national retailer which sells fashionable clothes and other merchandise to an upscale client base. It has over 150 stores in the U.S. It is known for superior customer service in which salespersons and other employees go well beyond the call of duty to help customers with any relevant need. Its direct competitors include Saks Fifth Avenue, Neiman Marcus, and Bloomingdale’s. Like nearly all major retailers, Nordstrom is feeling the effect of these turbulent times in the U.S. economy. According to Reuters Nov. 13th, 2008 online edition, “Consumers grappling with falling home values, job losses and a bleak economic picture have pulled back on purchases of all but essential items, and shoppers are expected to keep a tight grasp on their wallets well beyond December.” This same article states that, “Nordstrom reported a net profit of $71 million compared to $166 million a year ago for the 3rd quarter.” This 57% drop in profits occurred because critical masses of wealthy customers are searching for bargains. Now more than ever, customers are focused on Value.

Nordstrom’s: Subtract, Then Maintain and Add Features
Well – what can Nordstrom do to combat this flight and return to higher profitability? On the F3Q08 Earning Conference Call, Blake Nordstrom, President of Nordstrom, said, “Even affluent customers, typically more resistant to economic malaise, are shopping less and are making more deliberate purchases.” Macro factors are hurting Nordstrom’s core value proposition and business model. Nordstrom can directly combat the shift to buying based on value along with seeking lower price points on various purchases. They should implement the specialized Blue Ocean Strategy which was outlined in my previous two articles of “Blue Ocean Strategy in a Recession Series.” Examine what current Nordstrom shoppers perceive as less important in their shopping experience. Then, reduce or eliminate that factor. The object is to lower costs across a set of items with low utility features. To maintain or even raise perceived value to customers, Nordstrom must select elements of its high quality services practice which customers especially like or can’t do without and maintain the resource investment in them. They can even use the newly available resources from the “selective resource reduction” to add to valued features and benefits. This practice of subtraction, then addition, will encourage the perception of Nordstrom as a place with a value orientation, while maintaining the loyalty of its “regular” or core customers.

Blue Ocean Strategy in Recession Series: Key Costs Lowered – Now Differentiate

How To Differentiate
Now, here’s how to differentiate using Blue Ocean Strategy, while maintaining or minimizing costs. It’s all about the key benefits of your product and/or the key customer touch points for service-oriented businesses – these have the greatest effect on perceived satisfaction or quality. It is vital to understand the perception of key benefits of your product or service – and the features which relate directly to them. Look to maintain these features during any economic climate, especially a recession. But, use the strategies of cost reduction previously discussed, to drop costs for certain “over-supplied” features.

Combat Recession – Eliminate Low Utility Features
During this recession, an interesting but predictable shift in spending habits has occurred with U.S. consumers. They are rapidly trading down in the retail categorization, out of mid-range or up-scale stores or food providers. McDonald’s sales were up last quarter, as consumers are spending less at mid-range and premium restaurants. So, what can the mid-range and premium product and service providers do? Again, use the lower costs strategy. Offer products or services which eliminate – not just lower — cost, and eliminate low utility features and/or benefits. Look at dimensions which can be gotten rid of altogether. This will lead to developing lower cost products which focus on “low cost” or “value” consumers. This will expand the reach of your consumer base, and should offer increased sales and revenue.

Innovation With Lower Costs Products
This optimized “dipping” will lead to either new products or services, or line extensions – both options have solid benefits. The key for either new product development or line extensions is to retain the important features and benefits of the mid-range or premium product and brand. It allows your products and services to remain branded which is key because your products will likely be competing against private label goods. If your company can innovate a new product while maintaining key benefits with lowered costs – that is optimal. Avoid “me too” line extensions if you can, and extend products consistent with the brand but with some differentiable qualities. This will raise your product or service’s utility above private label products and other lower-cost brands.

Innovating With A Reduced Budget
An important aspect of this strategy is that it allows a business to innovate with a reduced budget and lower revenues. The key differentiating features of your product or service must be maintained – and even enhanced and further developed. The costs that are taken out of production, distribution, and/or customer provision and service delivery, balances the up-keep or selective addition of expenses in critical customer high-utility areas. Executives and managers – focus on the key elements of the customer experience for your product or service. This allows your product or service to stay true to the brand, and more importantly affirms customer expectations and perception. Remember, it comes down to this for your product or service’s feature dimensions: prioritize, select, and augment (by developing or enhancing).