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 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).

Home Depot Blue Ocean Solution

Cluster Strategy’s Efficacy
Home Depot’s Frank Blake recently built a system to analyze demographic information and customer preferences. They sorted stores into 30 “clusters” with similar attributes. This is exactly the right paradigm for its store managers. It can have huge strategic effect on Home Depot stores in a lot of different and important ways. It can indicate and flag the price elasticity or inelasticity for key store items which are either high volume sellers and/or have wide margins. This ties directly to the consumer trend toward value, because now a store manager and headquarters know the effect of discounting certain key items in a given locale or region’s stores. Also, regional and local marketing campaigns’ efficacy can be measured more accurately. The key drivers or marketing tactics for a given demographic can be traced and adapted to areas and regions with similar demo-traits. This translates directly into selling more targeted goods, because of a higher level of marketing effectiveness. Lastly, in-store layouts and point-of-purchase displays can be tailored and emulated in the stores within a given cluster to optimize opportunistic sales.

What Localization’s Blue Ocean Means
Effective localization accomplishes the goal of blue ocean strategy which is to be stronger on dimensions which mean the most to customers. This leads to a factor which is typically symptomatic of a good blue ocean strategy: “more sales, more often” than what your company did before, and usually more than direct and indirect competitors. Localization like any good blue ocean strategy increases demand for your company’s goods or services. A result of this blue ocean strategy is that sales can increase regardless of pricing, and lead to higher margins even with the market’s trend toward value and lower prices. Home Depot is proof-positive of this important characteristic – its gross margins have risen in each of the past three quarters compared with a year ago. This is impressive when considering how terrible the housing market is and that their aggregate sales have slid as a result.

Dive Into The Water: Differentiate And Lower Costs
Home Depot is diving deep into the blue ocean waters of using local data and factors to decentralize purchasing patterns for its individual stores. This is likely to lead to offering and services which are unique to individual stores that can then be shared with other stores that have like local factors. And this is really what distinguishes and separates retailers from one another – what they offer and sell it at, how they offer it, and how this is communicated to customers. Localization impacts all three of these aspects, and as with any good blue ocean strategy, differentiates and minimizes costs. All retailers need to consider diving in, but just make sure the water is blue (the right tactics) and you can swim (are able to execute). Then the water will be fine!