Inside Amazon's Playbook: How Bezos Built Today's GE(forbes.com)
forbes.com
Inside Amazon's Playbook: How Bezos Built Today's GE
http://www.forbes.com/sites/venkateshrao/2011/12/14/the-amazon-playbook/
18 comments
"This is business strategy 101: are we good at something? Can we use that to make money from other companies that need the same thing?"
Uh huh. Problem is, the advice gets kind of fuzzy past the business 101 course:
* Pick up a book on marketing, and it'll tell you not to overextend your brand (like, say, from selling books to selling everything to website hosting to online video to making freaking computers).
* Pick up a book on finance, and it'll tell you to avoid investing heavily in depreciating assets (investors were calling for Bezos' head when they were building a massive distribution infrastructure in the late 90s; now Amazon is doubling down on server infrastructure, while most other players are selling it off).
* Open the finance book to another chapter, and it'll tell you to outsource things that aren't your core business competency (Amazon manages distribution centers, writes software, designs and builds computer hardware, builds datacenters, publishes books, delivers online video to your television...it even does its own packaging design!)
* Pick up a book on sales, and it'll most likely tell you not to cannibalize existing product lines by launching products in unproven new categories (like, say, manufacturing and selling e-book readers at a loss, when your primary business is the sale of physical books).
Amazon's moves only look obvious in hindsight. They've made a huge number of excellent strategic decisions that were roundly criticized by investors and business analysts when they were first announced.
Uh huh. Problem is, the advice gets kind of fuzzy past the business 101 course:
* Pick up a book on marketing, and it'll tell you not to overextend your brand (like, say, from selling books to selling everything to website hosting to online video to making freaking computers).
* Pick up a book on finance, and it'll tell you to avoid investing heavily in depreciating assets (investors were calling for Bezos' head when they were building a massive distribution infrastructure in the late 90s; now Amazon is doubling down on server infrastructure, while most other players are selling it off).
* Open the finance book to another chapter, and it'll tell you to outsource things that aren't your core business competency (Amazon manages distribution centers, writes software, designs and builds computer hardware, builds datacenters, publishes books, delivers online video to your television...it even does its own packaging design!)
* Pick up a book on sales, and it'll most likely tell you not to cannibalize existing product lines by launching products in unproven new categories (like, say, manufacturing and selling e-book readers at a loss, when your primary business is the sale of physical books).
Amazon's moves only look obvious in hindsight. They've made a huge number of excellent strategic decisions that were roundly criticized by investors and business analysts when they were first announced.
I'm taking business classes right now, so I can comment on some of your points, in particular this one:
"Pick up a book on sales, and it'll most likely tell you not to cannibalize existing product lines "
Current books explicitly advice to be willing to cannibalize, for example Jakki Mohr's (I took classes with her):
http://books.google.com.uy/books?id=8LJwaPuuQagC&lpg=PA8...
based on this paper: http://www.jstor.org/pss/3152166
I also took a course on Strategy, and it did endorse Amazon's strategy, by focusing on the shift from the traditional "choose a generic strategy" (as in Porter's framework) to developing capabilities (such as Amazon's logistics) and then entering sectors where you have said competitive advantages.
We also talked about umbrella brands, its pros and cons, it's by no means a given that extending is bad.
Some of your points are indeed presented that way (for example it's still common to recommend outsourcing), but others are now taught differently.
"Pick up a book on sales, and it'll most likely tell you not to cannibalize existing product lines "
Current books explicitly advice to be willing to cannibalize, for example Jakki Mohr's (I took classes with her):
http://books.google.com.uy/books?id=8LJwaPuuQagC&lpg=PA8...
based on this paper: http://www.jstor.org/pss/3152166
I also took a course on Strategy, and it did endorse Amazon's strategy, by focusing on the shift from the traditional "choose a generic strategy" (as in Porter's framework) to developing capabilities (such as Amazon's logistics) and then entering sectors where you have said competitive advantages.
We also talked about umbrella brands, its pros and cons, it's by no means a given that extending is bad.
Some of your points are indeed presented that way (for example it's still common to recommend outsourcing), but others are now taught differently.
Yes, I was a little careful in how I phrased that one, precisely because some people are beginning to teach something different. But the exceptions prove the rule -- Amazon was one of those revolutionary companies that did things contrary to the conventional business-school wisdom, and in the process re-invented what was taught.
Good point :) and nicely phrased. And indeed, Amazon was one of the examples taught in class, so I agree that they helped re-invent what is taught.
I always find the gushing articles about Amazon super annoying as an ex-amazonian.
Part of amazon's business practice is to take people, chew them up, spit them out. Replace them with new grads.
Regardless of if this is successful or not, the question really should be is this ACCEPTABLE or not.
After all, there are many successful approaches that are illegal and immoral and we eschew them and universally revile them.
Part of amazon's business practice is to take people, chew them up, spit them out. Replace them with new grads.
Regardless of if this is successful or not, the question really should be is this ACCEPTABLE or not.
After all, there are many successful approaches that are illegal and immoral and we eschew them and universally revile them.
> It is a story that called for strategic depth, not technical wizardry, design brilliance or sheer energy.
While I can't argue that Amazon has displayed "design brilliance or sheer energy" I do consider the creation of AWS and running the Amazon store front at its current scale to be acts of "technical wizardry". It's really unfortunate to downplay the contribution of the brilliant engineers who made Amazon possible.
While I can't argue that Amazon has displayed "design brilliance or sheer energy" I do consider the creation of AWS and running the Amazon store front at its current scale to be acts of "technical wizardry". It's really unfortunate to downplay the contribution of the brilliant engineers who made Amazon possible.
Forbes by and large markets to business types, an audience that's going to be looking for the business side of a win.
Shiny suits don't typically want to hear about engineering heroics because anything that involves success without a bunch of MBA's behind it subtly implies that they're irrelevant.
Shiny suits don't typically want to hear about engineering heroics because anything that involves success without a bunch of MBA's behind it subtly implies that they're irrelevant.
I really like this comment. The MBA-ization of corporations is not a thing to be praised. The reason why companies fail is because management is disconnected from the realities of their business and manage it from a spreadsheet point of view. See "Execution: The discipline of getting things done" for a lucid explanation of what execution is, why it matters and why companies succeed and fail. Hint: Companies who have CEOs that know little of how the company actually works are not to be emulated.
Not only was it technical wizardry, but it was a huge gamble.
According to the article, Take AWS for instance. The business had no right to succeed. It violated all sorts of textbook rules about brand elasticity, market positioning, core competency management and so forth.
He lambasts Google for the same risk taking with Google+
According to the article, Take AWS for instance. The business had no right to succeed. It violated all sorts of textbook rules about brand elasticity, market positioning, core competency management and so forth.
He lambasts Google for the same risk taking with Google+
His point was that it is a gamble as part of a greater strategy
Amazon's advantage are mostly -though not entirely- in the superb logistics that allow them to undercut competitors' prices. Beyond low prices, there is not much that is unique and can't be duplicated.
I think GE at its prime had more intrinsic advantages and unique technologies than just superb logistics.
I think GE at its prime had more intrinsic advantages and unique technologies than just superb logistics.
While superb logistics are not unique to Amazon it is just one factor that combined with other mostly non-unique factors creates a very unique and hard to duplicate advantage:
1) The marketplace - Amazon's website are massive marketplaces with tons of sellers, millions of customers, tons of reviews, etc. 2) Third party seller network - Amazon has thousands of people that sell on its site. This results in lower prices, more selection, and more money for Amazon when they take their cut. 3) Fulfillment - Yes Amazon has logistics but it also has Fulfillment by Amazon. Third party sellers can send Amazon their inventory. Amazon charges them 'rent' for this. Plus Amazon does not have to take inventory risk on that item yet it is still available to customers 'within 24 hours'. And to top it off Amazon still gets their cut of the sale.
And the one ring to bind them all: 4) Prime - a shipping subscription to keep people looking at Amazon before anyone else.
Any one of these alone is a great thing to have and several companies do -
Ebay and Craigslist have a marketplace and third party sellers but they don't have a fulfillment network. This fundamentally limits the customer experience they can achieve.
Walmart has a marketplace and a fulfillment network but their third party network is in its infancy. It will take years to work out how they merge catalogs and can deal with fraud issues and the like.
FedEx and UPS have fulfillment and programs to store your inventory but they lack the marketplace to sell on. UPS customers will still end up selling on Amazon giving Amazon a cut of the sale. Plus using Amazon's fulfillment gets your inventory available to customers faster and usually results in more sales.
Prime is a major competitive advantage that pretty much no one else can offer. You aren't going to buy a subscription to Barnes & Noble or Best Buy. I've heard of some companies trying to band together and offer a shipping subscription. I'm doubtful that without very tight integration they can make that profitable.
That isn't to say no one can catch up (Walmart is probably the closet) but I think we're looking at decades of dominance.
1) The marketplace - Amazon's website are massive marketplaces with tons of sellers, millions of customers, tons of reviews, etc. 2) Third party seller network - Amazon has thousands of people that sell on its site. This results in lower prices, more selection, and more money for Amazon when they take their cut. 3) Fulfillment - Yes Amazon has logistics but it also has Fulfillment by Amazon. Third party sellers can send Amazon their inventory. Amazon charges them 'rent' for this. Plus Amazon does not have to take inventory risk on that item yet it is still available to customers 'within 24 hours'. And to top it off Amazon still gets their cut of the sale.
And the one ring to bind them all: 4) Prime - a shipping subscription to keep people looking at Amazon before anyone else.
Any one of these alone is a great thing to have and several companies do -
Ebay and Craigslist have a marketplace and third party sellers but they don't have a fulfillment network. This fundamentally limits the customer experience they can achieve.
Walmart has a marketplace and a fulfillment network but their third party network is in its infancy. It will take years to work out how they merge catalogs and can deal with fraud issues and the like.
FedEx and UPS have fulfillment and programs to store your inventory but they lack the marketplace to sell on. UPS customers will still end up selling on Amazon giving Amazon a cut of the sale. Plus using Amazon's fulfillment gets your inventory available to customers faster and usually results in more sales.
Prime is a major competitive advantage that pretty much no one else can offer. You aren't going to buy a subscription to Barnes & Noble or Best Buy. I've heard of some companies trying to band together and offer a shipping subscription. I'm doubtful that without very tight integration they can make that profitable.
That isn't to say no one can catch up (Walmart is probably the closet) but I think we're looking at decades of dominance.
Great point. I have been a prime subscriber since my freshman year of college. They offered anyone with .edu email address a free year, and I bit. When my year ran out, they offered me a second year at half price. Now I probably spend at least $100 on Amazon a month on various things - and free 2 day shipping makes it even more attractive.
The blind hero worship in this article made me feel embarrassed for the author.
An alternative hypothesis is that Amazon have been good at taking the next good step, without necessarily relying on some flawless uber-strategy. This is sometimes called coup d'oeil -- "stroke of the eye".
A most notable example was Napoleon's willingness to seize opportunities or to avoid battle based on his views of a potential battlefield. If he could see an obvious way to win, he took it. If not, he kept marching. He was sufficiently better at taking the next good step that, for a long time, he was unbeatable.
The chess analogy is common amongst management writers, but it is fatally flawed. Firstly, chess is infinitely simpler than actual life -- not least because 'pawns' in real life resent being treated as pawns. Second because even grandmaster chess players rely on a mix of intuition / associative memory, heuristics and only partly on actual planning to win.
An alternative hypothesis is that Amazon have been good at taking the next good step, without necessarily relying on some flawless uber-strategy. This is sometimes called coup d'oeil -- "stroke of the eye".
A most notable example was Napoleon's willingness to seize opportunities or to avoid battle based on his views of a potential battlefield. If he could see an obvious way to win, he took it. If not, he kept marching. He was sufficiently better at taking the next good step that, for a long time, he was unbeatable.
The chess analogy is common amongst management writers, but it is fatally flawed. Firstly, chess is infinitely simpler than actual life -- not least because 'pawns' in real life resent being treated as pawns. Second because even grandmaster chess players rely on a mix of intuition / associative memory, heuristics and only partly on actual planning to win.
I think anyone who has any idea what goes on inside Amazon, coupled with shopping on Amazon's store, knows that it is both strategy and technology that fuel its progress. In short: equal parts engineering and business skills.
eBooks are the engineering afterthought that careful business planning brought to fruition. Amazon never set out as a business to upset the book industry, just like Apple/Google never set out as a business to upset the mobile handset industry.
I see many plays Amazon has made as a sort of hydra start-up company. Take a piece of technology: how can we turn this into a business nobody has tapped into? How can we use pre-existing models that work well to push our form further?
I remember years ago when Amazon was bringing its clusters into the grid-computing-for-pay arena, now known as "cloud computing services". I thought it was kind of a joke; they had too many servers and needed a way to pay for it all. Turns out they found repeat customers.
I remember when people started telling me they bought all their books on Amazon, and tons more of them since they were so cheap. I thought, oh great, a book wholesaler; probably not the same thing as getting the newest books quickly and at a competitive price. Turns out when you own the entire process of putting words to eyes it becomes a pretty good repeat business.
I don't think the execs of Amazon live in a bubble. I think they share information and work toward solutions like engineers do. That isn't to say they aren't vulnerable of classic business blunders, but if their corporate culture remains one of vision AND simple problem-solving they might just accomplish some more monumental feats - all the while staying in the black.
eBooks are the engineering afterthought that careful business planning brought to fruition. Amazon never set out as a business to upset the book industry, just like Apple/Google never set out as a business to upset the mobile handset industry.
I see many plays Amazon has made as a sort of hydra start-up company. Take a piece of technology: how can we turn this into a business nobody has tapped into? How can we use pre-existing models that work well to push our form further?
I remember years ago when Amazon was bringing its clusters into the grid-computing-for-pay arena, now known as "cloud computing services". I thought it was kind of a joke; they had too many servers and needed a way to pay for it all. Turns out they found repeat customers.
I remember when people started telling me they bought all their books on Amazon, and tons more of them since they were so cheap. I thought, oh great, a book wholesaler; probably not the same thing as getting the newest books quickly and at a competitive price. Turns out when you own the entire process of putting words to eyes it becomes a pretty good repeat business.
I don't think the execs of Amazon live in a bubble. I think they share information and work toward solutions like engineers do. That isn't to say they aren't vulnerable of classic business blunders, but if their corporate culture remains one of vision AND simple problem-solving they might just accomplish some more monumental feats - all the while staying in the black.
single page?
Just one example: Take AWS for instance. The business had no right to succeed. It violated all sorts of textbook rules about brand elasticity, market positioning, core competency management and so forth. But it was the right game for Amazon.
What in the world is this based on? How about the successful example of LSG Sky Chefs, created from Lufthansa's need to supply food for its airplanes and now the largest provider of airline food worldwide? Or Sodexho, which started out as Marriott's food supplier/catering service? This is business strategy 101: are we good at something? Can we use that to make money from other companies that need the same thing?
Throughout the article the author ascribes brilliant strategic thinking to Amazon while dismissing successes from its competitors as strokes of luck. Sadly, he doesn't bother to provide any evidence of either the presence of strategic thinking at Amazon or the absence of it elsewhere.
Not even the achilles heel he claims he "discovered" is special to Amazon; it has been demonstrated amply by every other company he mentioned: see Apple's simultaneous supply deals and lawsuits with Samsung as just one example of the friends today, foes tomorrow state of business today.