We started this course by thinking about the different changes that the digital transformation has made in the retail industry, and in particular, how these changes had affected the retail supply chain. In the second module, we took a deep dive into one of the most critical capabilities that retailers need to develop and navigate the digital transformation successfully, analytics. We learned how data analytics is a fundamental capability at the core of any successful supply chain. We will now move one step forward, and turn to our next topic that will help us improve the understanding of the digital transformation landscape. In this module, we will focus our attention to the disruption driven by digital platforms and its implications. We will learn how to best position ourselves to succeed in this changing environment. Digital platforms are not new. In fact in many cases, these are the dominant players across different industries today. However, the radical change that a platform brings to the industry can easily be overlooked. Today, Airbnb, one of the largest accommodation providers in the world, owns no real estate. Uber, Lyft, DiDi, arguably the leading taxi companies in the world, own no vehicles. When we look at the retail industry, the situation is no different. Several of the largest retailers in the world today, such as Amazon, Alibaba, Mercado Libre, don't own any retail stores. They rarely own the products that they are selling to the end-customer, and their underlying business has little to do with a traditional retail company. However, these platforms compete head to head with retailers. From the customer perspective, it is unclear what the difference might be. What exactly are these platform doing? Why are they so successful, and how are they transforming the retail industry? To understand this transformation, we need to go back to the supply chain structure we discussed in our first module. We saw that the supply chain starts with the design and manufacturing of the products. These products are then shipped to the distribution centers. From there, the product will be sent to a retail locations where ultimately customers will buy the product. In the mid 90s, e-commerce introduced a radical change to the supply chain. The need to go and visit a physical store was expanded with the possibility to visit a virtual store. The need to bring the product to the retail location was no more required. During the early days of e-commerce, mostly traditional retailers built distribution centers to fulfill orders coming from the digital stores. This was a transformational step, and the basis for what was coming next. Soon after that, the first digital platform started to emerge. The logic was simple, but the change was radical. Retail platforms learned quickly that the opportunity and the value creation was more in connecting customers with sellers in the digital world than in selling the products themselves. If you think about it, the role of platforms like Amazon or Alibaba is much more similar to the role of a mall operator than the role of a retailer. A mall operator provides the infrastructure, and the services needed for both customers and sellers to meet and transact. For that service, the mall operator charge a commission to the seller. However, these operators are rarely involved in buying inventory, shipping products, deciding on product prices, or assortment. The focus of their business is to make the mall attractive to both customers and sellers. To the sellers, they offer a large number of visitors willing to navigate the mall, looking for the next thing to buy. To the visitors, they offer a convenient location, filled with the best assortment of products and services for them to buy. The role of the digital platform can be describe in very similar terms, which might be a reason why while digital platforms are thriving, the traditional malls are struggling. A successful platform needs to be attractive to both sellers and customers. In fact, from the platform's perspective, there are two customers: the end-customers that will be buying the product, and the seller that will display the product on the platform. The success for the platform depends on its ability to attract customers to the site. But that will only happen if it successfully attract the best sellers. The digital platform creates value by attracting the best sellers and sometimes all the sellers and all the customers. In addition, the platform focus their efforts on developing and improving the services needed for customers and sellers to have a smooth experience. In the first module, we saw that the flow in the digital supply chain includes products, payments, and information. I don't think it is a coincidence that these are the main three areas where the digital platforms invest and develop solutions for sellers and customers. Successful retail platforms were able to recognize that a successful digital retail experience requires state-of-the-art digital supply chain. These platforms develop digital payment methods for customers and are heavily involved in digital financing for both sellers and customers. Digital payments are a driving force of these platforms. In many cases, the use and relevance of this payment methods go well beyond the doors of their retail platform. Today, in many countries around the world, we see that the most common payment options were developed and fueled by a digital platform. Customers have moved away from cash payments and transitioned to an electronic payment method without ever using traditional credit cards. But the transformation is not limited to payments. This retail platforms partner and help develop the whole new wave of third-party logistic companies. These logistic platforms have become massive and provide the logistic infrastructure that the platforms need to sustain the growth of the sellers and ultimately serve the customers better. The e-commerce share has grown steadily and there are no signs of slowing down in the near future. A good portion of that growth has been driven by retail platforms and their ability to develop the logistic infrastructure needed for e-commerce to thrive. The flow of products in the supply chain, now digital supply chain has gained a scale and speed that was hard to imagine a few years back. Finally, the information flow is at the core of the digital transformation driven by the platform. Information availability and transparency is a key factor of their business success. Customers and sellers benefit from this information flow that occurs through the platform in an organized and frictionless fashion. Sellers can list hundreds or thousands of products, provide detailed descriptions and adjust price easily. Customers can buy product with a few clicks, provide feedback to the sellers, review those products, and track their orders all in one place and digitally. The volume of information that retail platforms handle can be overwhelming, but it is at the core of their business model. This information is not only one of the main flows that the platform needs to manage, but an invaluable asset. Now that we have a better understanding of the role of the digital platforms in the retail sector, let's step back and compare and contrast this new business model with the traditional e-commerce. Unlike a traditional retailer, the platform will not need to buy inventory, set prices, or get involved in shipping the product. This gives the platform the possibility to carry a large number of products categories with huge variety. In this sense, the assortment of the traditional e-commerce store is limited. But these relatively smaller assortment come with the benefit of avoiding the customer getting overwhelmed by the different options. Traditional retailers tend to offer, on average, better quality. The quality is better because of the curation of the assortment that the retailer can do, and because the retailer can guarantee that the products sold will be shipped properly and in good condition. More importantly, the retailer can guarantee that the customer will not receive a counterfeit. This curation role and the quality control is something that the platform has a hard time controlling and it can become a source of tension between the platform and the individual sellers. Something similar happen when it comes to the product delivery. Several retail platforms still offer today a delivery process that for the most part is decentralized. This means that there is a lack of consistency within the platform on the timing, reliability, and delivery cost. This delivery features are left to the vendors and for that reason, there is a wide range of options and outcomes. In the platform, it is possible to buy multiple products from the same vendor. However, this can become challenging for the customers. Sellers are not able to stop customer from adding to the cart a product that is offered by a different seller. From the customer perspective, she's placing an order with multiple items to one retailer, the platform. In reality that one order is made of multiple orders that belong to each one of the individual vendors involved in that transaction. This is one of the reasons why vendors tend to focus on minimizing costs rather than offering a consistent experience for the customers. To address this issue, several platforms had stepped in and develop initiatives that tried to mitigate this shortcoming. In some cases, the platform get directly involved in the development of a third-party delivery network that can help improve the last mile experience for customers. In other cases, it is a thriving digital ecosystem that offers a solution to the platform and ultimately the consumers and the vendors. Everybody benefits from the role of these third-party delivery companies. When it comes to shipping, e-commerce retailers can offer a more uniform experience to customers in terms of timing, packaging, and cost. Let's consider now, what is the fundamental difference between the traditional retailer and the platform? At the core, the difference starts in the underlying business model. For the e-commerce retailer, the revenue source is based on the traditional retail format, offering the right product in the right place at the right price. If attractive to customers, this offering will allow the retailer to charge a markup to those products they sell. In the case of the platform, the main source of revenue comes from a commission and advertisements that the platforms charge to the vendors, a radical difference from the e-commerce approach. In some cases, the platforms will obtain their revenues almost exclusively from advertisement, no commission. It is very important to notice that the radical difference in the underlying business model and the revenue streams is opaque to the end customer. However, the retail platforms and the e-commerce retailers compete head-to-head for the same set of customers. Today there is a very relevant actor in the digital transformation landscape, the digital integrated brand. Brand, and especially digital savvy brands have grown in importance over the recent years. The role and relevance of brands is only going to keep up growing going forward. Brands can take different roles in the digital supply chain. Traditionally, they were mainly focused on the design and manufacturing of the product. This product needed to be attractive to customers, but will be sold through retail chains. Think of apparel brands like Adidas or Nike, or electronic brands like Philips or Samsung. However, over time, the role of brands in the supply chain expanded and several of these brand started to integrate forward and open their physical retail stores. Other brands were born as an integrated brands and from day one, they were involved in all steps of the supply chain, from the design and manufacturing to the retail store. Think here of apparel brands such as Zara, Gap or H&M. Another example in the home furniture space is IKEA. These brands from the inception moment where all designing, manufacturing, and selling the product to the customer. Years before the digital transformation of the retail sector, a good number of brand that started focusing on the first steps of the supply chain saw the value and the opportunity of opening retail stores. This opportunity goes beyond the increased margin or controlling the brand experience all the way to the customer touch point. It gives the manufacturing brand access to customers data first-hand without the need to ask and sometimes beg retailers for this critical information. Today, most well-recognized brands will have a retail footprint that allows the company to have direct access to the end customers and learn from that crucial step in the value chain. Brands like Lego and Apple are great examples of this forward integration. When the digital devolution hit the retail industry, even more brands saw the opportunity and the value of having direct contact with their customers. Today, brands that don't have their own online store are more the exception than the rule. Of course, this doesn't mean that they don't sell through traditional retailers and platforms. However, it does mean that the relationship with them is more complex than before. The strategic relevance of the digital presence for the brands cannot be overstated. Native digital integrated brands have been a real disruption in their digital space. We will come back to this phenomenon in our next module.
