Friday, February 13, 2009

Microsoft to Open Retail Stores

The Wall Street Journal reports that Microsoft has hired a former Wal-Mart executive to lead an effort to open a number of Microsoft retail stores. This news raises several interesting issues. First, forward integration into retail can be a very tricky thing. Certainly, companies such as Apple and Ducati have benefited greatly from their retail strategies. These firms have used forward integration as an effective mechanism to further enhance their product differentiation and gather valuable information and feedback directly from consumers. For Apple and Ducati, the retail store represents a rich experience that they are trying to create for their customers. They came to the conclusion that they had to control the retail environment through ownership in order to manage that experience optimally.

However, many firms have stumbled with such strategies. Gateway clearly did. Of course, their product strategy was not based upon differentiation, design, and a rich, emotion-laden experience for their consumers. Thus, the retail stores did not add a great deal of value for them, while proving costly to operate. Gateway did not have a strong rationale for forward integration. Disney, on the other hand, seems much more like Apple or Ducati in terms of their differentiation strategy, yet they have struggled with their retail stores. Disney's experience proves a cautionary tale for firms who are considering forward integration into retail.

Second, forward integration means that a product firm is now competing with its channel partners. In this case, Microsoft will find itself competing with partners such as Best Buy, Staples, and the like. Apple has navigated these relationships quite effectively, but many firms stumble in this regard when they forward integrate.

Finally, it's interesting to note that Apple hired a Target executive to run its retail stores, while Microsoft has hired a Wal-Mart executive. It makes a great deal of sense for Apple to turn to a Target veteran since both firms share a differentiation strategy; both firms want to create an emotional connection with their customers; and both firms emphasize the importance of design. Wal-mart, however, has excelled at a low cost strategy, not a differentiation strategy. In fact, Wal-mart might have one of the most effective low cost strategies we have ever seen. How does this type of experience help Microsoft though? Do they want their stores to "wow" people, create rich experiences for their users, etc? What type of retail environment does Microsoft aim to create? These questions will be crucial for the firm to answer as it develops its forward integration strategy.