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!

Change To Localization Orientation Is Key
The new CEO, Frank Blake, tackled this problem, and changed Home Depot’s purchasing system which favored national uniformity at the expense of local preferences to a less centralized system. His new system balanced local demand with national efficiency. Localization of purchasing for retailers is critical for two reasons. First, it can lead directly the development of blue oceans in products and services. Secondly, from a shorter-term, more quarterly perspective, it enables a retailer’s stores to own marketspace geographically. Wal-Mart’s meteoric rise is based in creating local monopolies in “small town” America. The real explosion for retailers occurs when geography is linked to demographics and usage habits.

Wal-Mart Example: Link Geography To Demographics And Usage
Wal-Mart is beginning to understand this linkage – they created a group of 350 people around the country to better respond to local preferences. Wal-Mart also hired experts to produce more detailed demographic information about each store’s customer base. By linking demographics and customer usage to a locale or region, a retailer becomes more responsive and speedier in spotting buying trends and habits which affect an individual store’s profitability and margins. These twin metrics are even more important now during our current challenging economy as consumer sentiment and buying habits are shifting more toward value. Even Target’s usual value proposition and communication to its customers of “Expect More, Pay Less” is being skewed by them to the “Pay Less” side – truly a sign of the current tough times.

Home Depot Blue Ocean Strategy Localization Wal-Mart Robert Nardelli Frank Blake Turbo Tagger