National Retail Federation
"A New Era of Value"
New York City
January 13, 2014
Thank you, Terry. I am so honored to be here, and so excited to share perspectives with all of you on some important developments in my industry, and what they mean to your industry.
This is such an exciting time for all of us. New possibilities for engaging with people in entirely new waysâ€¦ and for innovationnot just in products and services, but in all the ways your enterprise operates. But it also comes with new challenges and new risksrisks not just to your bottom lineâ€¦ but also to your most precious assetyour brand.
The key will be understanding what truly matters. So let me describe these developments that are transforming my industry. And let me assert to you that their real import is not about the technology, itâ€™s about business:
- Iâ€™m going to talk about Big Databut what Iâ€™m really talking about is what we believe to be the key source of competitive advantage in all industries.
- Iâ€™m also going to talk about the new kind of IT infrastructure called Cloud. But what Iâ€™m really talking about is how you can manage the balance between far greater agilityâ€¦ and far more need for security.
- And finally, Iâ€™m going talk about a radical new model of computing we call â€ścognitiveâ€ťbut what Iâ€™m really going to be talking about is a whole new kind of relationship with employees and customers.
How many of you have heard about Big Data?
It's a hot buzzword, right? Well, hereâ€™s a rarity for my industry: This one is not overhyped. In fact, it is under-hyped. Big Data is of historic importance.
Data is the world's great new natural resource. What steam power was to the 18th century, electromagnetism to the 19th and fossil fuels to the 20thâ€¦ data will be to the 21st.
Let me explain why I say that.
We are witnessing a historic convergence of technology shifts, any one of which would have been sufficient to spark a new era.
As a result of all of this instrumentation and interconnection, every day we are generating 2.5 billion gigabytes of data. Thatâ€™s big. In fact, 80% of all the data in the world has been created in past two years.
Itâ€™s also variousitâ€™s coming from multiple, diverse sources. In fact, only one-fifth of the data we generate is â€śstructuredâ€ťthe kind that fits into neat rows and columns in a database. The other four-fifths is â€śunstructuredâ€ťfrom images and audioâ€¦ to the impulses emitted by billions of RFID tags and all those sensorsâ€¦ to the waves of people blogging, texting, posting and tweetingâ€¦ to the vast ocean of contextual data surrounding every event, every object, every location, at every moment.
Across all industriesvery much including yoursleaders are recognizing that data is the key to competitive advantage.
Now, I think weâ€™d all agree that the primary source of competitive advantage is serving, delighting, and winning customers. And data is changing the game, as technology moves out of the back officewhere its chief function was to improve efficiencyand into the front office, the point of customer contactin order to increase insight and deepen engagement.
Many retailers are using data now, to observe customersâ€™ behavior in real time and determine the â€śnext best action.â€ť Are you predicting your customersâ€™ future needs based on multiple sources of data? Are you proposing another product based on their previous purchases?
Hereâ€™s an example that goes even farther.
Okay, how else do we create competitive advantage? You would probably all agree, as well, that your supply chain is one important factor. And what is the classic example of using data to create a supply chain that is a truly unique advantage? Walmart, of course.
In all of this work, the value for enterprises increases as they apply more sophisticated analytics across more disparate data sources. We recently analyzed more than 200 cases of companies using data and analytics to drive business outcomesincluding 57 retailersto see what the best performers were doing differently with data. Two behaviors really popped out to me:
The results are striking. These leading companies are:
For the retailers in the group, we saw improved pricing and conversion ratesâ€¦ increased average basket sizeâ€¦ and increased promotional response rates.
So we all know that you can build competitive advantage by applying analytics to your supply chainâ€¦ and you can build a larger and more loyal customer base through Big Data analytics.
But are those your only sources of competitive advantage? What about your people?
Today, companies can build a better, more productive employee base by combining data analytics with behavioral science.
Consider hiring. Companies have traditionally placed their faith in the supposed â€śartâ€ť of interviewing to find the proverbial â€śgood fit.â€ť But research indicates that, left to their own judgment, employers select the right person for the job only about 50% of the time.
Today, thereâ€™s a better way. Let me give you an example from what might seem like the most mundane of jobsthe concession-counter employee at a movie theater.
Let me give one more interesting tidbit from some of our research. Maybe itâ€™ll help you in your hiring. In response to a question like â€śHow do you react when people disagree with you?â€ťâ€¦ one group of respondents take it personally and feel badâ€¦ another group finds it interesting and challengingâ€¦ and a third group doesnâ€™t care.
Well, it turns out that the first group make good salespeoplewhich is useful for all of us who hire a lot of them, right? The best ones are strongly motivated to resolve any disagreement. The second group make wonderful teacherstheyâ€™re excited about getting independent perspectives from their students. And the third group, the ones that donâ€™t care? They make great lawyers.
Finally, on this topic of competitive advantage through data and analyticsâ€¦ let me suggest one further source of rich data thatâ€™s a huge potential benefitbut that you may actually be thinking of as a liability.
Iâ€™m talking about your physical store.
Thereâ€™s so much fear out there about the specter of online retailing. And without question, e-commerce is surging. But let me offer two words of comfort.
First, the primacy of in-store shopping will persist for a long time, for very good reasons. You are the experts on the advantages of physical stores, augmented by the digital experience. You know that customers donâ€™t need a drone hovering over their houses. People are still pretty important in retailing! One study predicts that brick-and-mortar stores will still account for approximately 85% of US retail sales in 2025.
Second, stores are a gold mine of valuable data. Think about how much more you know if you have both physical and digital touch pointshow much more about actual behaviorâ€¦ about how a customerâ€™s time is spentâ€¦ about their interactions with peopleâ€¦ about how they react to their physical environment. The more facets of your customers you can learn from, the better position you are in to serve themâ€¦ and to win.
What we are seeing today is not simply a shift from physical to digital. Something entirely new is emerging at their intersection. Thatâ€™s where the new value is being creatednot just for cost-saving and efficiency, but for innovation and wholly new kinds of engagement.
Okay, now, my second point: How many of you have heard about this thing called â€śthe cloudâ€ť?
Be honest, nowâ€¦ How many of you know why cloud mattersâ€¦ what its value is for retail?
Let me offer a perspective on what cloud will meannot for individual consumers, but for enterprises and institutions. It offers many benefitsâ€¦ along with a number of challenges.
The technical architecture of Cloud computing is fascinating to people in my industryâ€¦ but not to ordinary humans. For enterprises, the key thing to understand about cloud is that it represents a new way to deliver business capabilitiesas digital services. In fact, the best definition of Cloud might be: â€śComputing delivered as a service.â€ť So-called â€śpublic cloudsâ€ť and â€śprivate cloudsâ€ť are just different kinds of services: some you want to control entirely, some you borrow or rent, some in between.
Now, itâ€™s easy to see why Cloud excites the market. It is a driver not just of greater efficiency and accessibilityâ€¦ but also agility and speed. And thatâ€™s especially appealing for retailers.
Consider that the average retail chain uses about 450 specialized software programsfar more than most other industries. These applications get heavy use at certain times, and are shut down at others. In fact, retailers use only about 10% to 15% of the computer capacity in their data centers. Huge economies of scale can be gained by using cloud to share infrastructure across multiple applications.
But as enterprises embrace cloud, they also face serious concerns about security and privacy. Security of their mission-critical enterprise data. And protecting the privacy of their customers and employees.
So companies face three important choices.
First, what kind of cloud environment will you build?
Let me answer that one very simply: Large enterprises simply cannot move their IT infrastructure onto a single public cloud. And they wonâ€™t. They will build their own cloud servicesaka â€śprivate clouds.â€ť They will use public cloud services. And they will integrate both with their existing IT systems. In fact, one analyst predicts that by the end of 2017, nearly half of large enterprises will have hybrid cloud deployments.
Second, how will your cloud manage your data?
In the world we are moving into, data management will be the most important design point for enterprise cloud environments.
Third, how will you make sure you can maintain visibility and auditability?
The fact is that enterprises will want, or be required, to manage their cloud environmentsincluding requirements like change control, access control, data loss protection and securityas if they were on-premises.
Leading retailers around the world are seizing upon the potential of cloud.
Now, this kind of shift matters to us at IBM. As our company has done in the past, we are looking to build the enterprise IT infrastructure for the next eramaking major investments in global scope, deep data management capabilities and the ability to offer our clients cloud environments that are actually better than their on-premises environments.
So, Cloud is not a replacement for your existing IT systems, but rather a significant enhancement of them. Built properly at enterprise-strength, this new IT infrastructure will offer huge benefits of efficiency, customer engagement and business intelligence.
Soâ€¦ a world of data that is changing industries and professionsand how you create competitive advantageâ€¦
And a new kind of infrastructure which, if done right, allows you to balance agility and security.
Pretty big deals, right? What if I told you that, ten years from now, both might seem like footnotes to a bigger revolutiona profound change in how organizations of all kinds engage with their constituenciesbe that customersâ€¦ or employeesâ€¦ or the public at large?
You may have heard of Watson. Itâ€™s the IBM computer that three years ago defeated the two all-time champions on the television quiz show Jeopardy! Today, it is pioneering a new era of what we call cognitive computing.
These are systems that can handle the vast ocean of unstructured data. They donâ€™t just find â€śthe needle in the haystack.â€ť They understand the haystack.
And they arenâ€™t programmed, like the systems weâ€™ve used for the past 50 years. These new systems learnfrom their own experience and from our interactions with them. Which is crucial, in a world where data isnâ€™t uniform and static, but diverse and in constant motion. There is simply no way to program a system for this new world.
Last week we launched a new Watson Group to scale how we translate that capability into business value.
Let me give you a taste of what is possible with Watson in retail today.
This is much more than a decision-tree or a vast database. It learns. It understands the implications of your questions. And starting later this year, it will be able to ask clarifying questions back.
In industry after industryfrom medicine, to finance, to retail and morewe arenâ€™t programming Watson, weâ€™re training it. It is absorbing the expertise of the worldâ€™s greatest cancer specialists, finance expertsâ€¦ even stellar customer service agents.
Just imagine that your best salesperson could be in front of every single customer every single time. And imagine if that best salesperson could keep getting better, because she has a collaborator of unprecedented learning power at her disposala system able to consider any question and arrive with a high degree of confidence at the right answer. Now imagine Watson doing the same for your most expert store managerâ€¦ merchandiserâ€¦ buyerâ€¦ store designerâ€¦ marketer.
Thatâ€™s not just a new era of computation. Itâ€™s a new era of human commerce.
This is an exciting time, a historic time, for my industry and for yours. However, this new world also raises serious issues of privacy and security, about which many are concerned, with good reason. Our new capacities to capture, analyze and act on data and to apply the insights of behavioral science create the potential for abuse.
Clearly, no matter how complex our global supply chains get, we canâ€™t outsource trust. More importantly, security and privacy protections canâ€™t be afterthoughts. They must be built into our systems and management practices from the get-go. In other words, we need security and privacy by design.
If we donâ€™t, there will be serious consequences. Two-thirds of U.S. adults say they would not return to a business that lost their confidential information.
Let me suggest three principles that should shape our thinking, our management systems and our policies in the coming era. They are principles that apply not to abstract institutionsâ€¦ but to how we treat each other as human beings: