In the latest quarterly earnings call, Target missed it numbers. It shared a disturbing news that no business leader can ignore. It stated, “Our fourth-quarter results reflect the impact of rapidly changing consumer behavior, which drove very strong digital growth but unexpected softness in our stores”.
Why should you pay attention to it? That’s because it has a deeper message for every business leader. It tells you how unprepared companies are in this age of disruption. Target’s message is about dealing with rapidly changing consumer behavior.
An Earning miss is not always a big deal
The street is rarely benign to a company not meeting its numbers, but there are some exceptions. You often are forgiven an earning miss if you are in the midst of a massive economic or a geopolitical crisis. After Russia had invaded Ukraine, it decimated a large part of consumer demand in Ukraine. It was an unpredictable event.
When oil price fell rapidly, and the Saudi Government was not able to disburse cash to its population the demand in Saudi Arabia fell fast. That event was less predictable.
When the Arab Spring shook country after country in the middle east, those markets saw a rapid decline in demand. It was one of the hardest to predict events.
Such unpredictable events with effect on markets sometimes make it impossible for a company to meet its numbers. One can blame the risk management strategies of companies, but in many such situations, all businesses in an industry get hit.
Why Tactical Issues Rarely lead to Earnings Miss?
If your production plans and demand forecasting is faulty, it can result in massive stock outs and missed orders. It can lead to a decline in volume. If your media mix and advertising fall flat in a quarter, you may not meet your numbers. But these tactical issues take place all the time. The reason why it rarely leads to a missed quarter is that you get offsetting gains elsewhere. In spite of problems in one part of business, most companies make their numbers with offsetting gains elsewhere.
What is Totally Unacceptable?
Short term business issues and unexpected larger environmental events are easy to understand. What is difficult to comprehend is when a company blames slow moving forces for the earnings miss. Consumers do not change their behavior overnight. Consumer insight groups, demand forecasters, and marketing teams keep a close tab on a changing landscape. They understand how to identify slow moving changes in consumer behavior.
But when a retailer finds the rate of consumer behavior change as too rapid, it is something deeper. A good company such as Target has spent decades mastering its ability to forecast demand across locations. Its Raison d’être is to fulfill consumer demand in the place where it arises in the cheapest and most efficient manner.
Dealing With Rapidly Changing Consumer Demand
The issue is larger than dealing with rapidly changing consumer demand. It is about dealing with increasing pace of change. As I discussed in my latest book A Sixty-Minute Guide to Disruption, companies in slow moving industries will find it difficult to deal with disruptive forces in absence of some major changes. These changes require a new set of mind sets, heuristics, and processes.
Firms need to build their tsunami alert systems and be ready with responses far ahead of time. In my book The Dark Side of Innovation, I detailed a model to predict change and a model to prepare responses to change in the age of disruption. Such models are now essential for all companies. Without new mental models and processes of a new era, companies will fail to survive.
We are in an age of disruption where the change is coming at us at a rapid pace. Without new mental models and new strategic processes, companies will find it difficult to cope with the new era. Business leaders have to build a tsunami alert system that tells them which tsunami will hit from which direction. Beyond that, they need to prepare for disruptive forces. They have to do that even before their tsunami alert systems identify an emerging threat. New models is the way to effectively dealing with rapidly changing consumer behavior.