Amazon’s
Innovation Magic
9/28/2012
Indian Institute of Foreign
Trade, New Delhi
Dr. R.K. Mitra, Kumail Fazal
International Conference
at
Global Innovation Forum
Tata Institute of Social Science
28th September, 2012
Abstract
Amazon
was founded by Jeff Bezos at a time when internet’s potential in business was
obscure, web-based business was pre-paradigmatic, there was hardly any industry
standard for internet security. When a product or innovation is in
pre-paradigmatic stage, one cant have any meaningful scale which is essential
for its commercial success. Many internet based start-ups rushed for early
market verticalisation with web-driven services only to discover that they did
not have requisite complementary assets to sustain the market vertical. Amazon,
on the other hand, held the technology as a key platform and using that
platform drove into retail market space with one category, namely ‘books’. It
tightly held the ‘technology platform’ and kept on disrupting the business
model one after another.
Underpinning its business strategy that powers its unique
business model of disruption, lies an astitutely designed ‘innovation magic’.
This paper seeks to capture the innate nuances of Amazon’s
innovation magic.
Key Words
Business Model, Disruption, Virtuous Cycles
The
word ‘Amazon’, until recently, conjured up an image of a river, dense forest
and perhaps giant Anacondas! But then
one man thought it otherwise, he went on to create a Retail Website company
that would not have limitations that a physical
business has. The man in question is none other than Jeff Bezos. Before
having his company name, he would gloss over dictionary and ended up with
‘Amazon’ as it starts with ‘A’, early in alphabetic order and also stands for a
place ‘exotic and different’. In today’s business lexicon, Amazon is another
name for ‘customer satisfaction’. It subsumes ‘confidence’ of widest range of
products, the ‘trust’ of sharing personal information and the ‘belief’ of
superior quality.
The rise
of Amazon is phenomenal. Started with one category ‘books’ in a garage
measuring 400 sq. ft in 1994, today, the company has 50 Fulfillment centers
located on 26 million sq. ft. of space! It is still growing! Exhibit 1 shows
its phenomenal growth trajectory over time.
Exhibit 1: Growth of
Amazon
Source: Read Write Web, Dan
Frommer, Amazon Vs Best Buy: A Tale of Two Retailers, Apr 2012
Experience
has shown that Internet hasn’t be very kind to business upfront. A large number of startups have had web as
the core of their business strategy but very few have survived the constant
changing competitive arena of the web. Then how did Amazon just not survive but
is giving the likes of Wal-Mart, Target, Best Buy to name a few, a run for
their money? It has won so much space into the heart and mind of the consumers
that it has left its competitors thoroughly bewildered as to the rule of game
of the business. Mighty Wal-Mart is reviving its e-commerce platform trying to
close sales both in-store or on the web, Target is providing its customers with
certain exclusivity, Best Buy in the USA has
been forced to close 41 of its Big Box stores and now concentrating on the
smaller Mobile stores
concept. So what really happened? How could these pioneers who till recently
were leading are today faltering behind a company which does not have a
physical presence of worth. What did Amazon did so differently and uniquely
over the years? It is simply by disrupting retail landscape.
Over
the years, Amazon has disrupted one business model after another. A typical
business model starts with a profit at its heart and run forward to catch the
customer but Jeff Bezos built a model where he first starts with the customer
and then run backward. It spends money on things that matter to customers and
they (Amazon) call this as frugality and this leads them to drive innovation.
It always is looking for simpler solutions to provide lower prices to its
customer.
Bezos
started a business in an era when Internet did have its own problems: no real
time metrics, limited reach and speed.
Bezos conceived Amazon at a time when it had security issues. People
were afraid of to share their credit card details with a third party over the
internet. He carefully assessed the true advantages that the Internet would
give and pushed them to their boundaries. It perfectly understood the time
tested economics of retail and blended it with technology to create an offering
with
·
Lower prices
·
Large selection
·
More convenience
Over
the years, it followed a three way approach where in it “built”
from time to time a new category(recent launches MyHabit), it “bought”
well established incumbent or competitors(it bought out Zappos.com, Quidsi to
name a few) and “partnered” with some verticals markets to offer
its technology services and e-commerce expertise to third parties.
Amazon
has a unique way of disrupting its own business model. In “Marketplace”,
it allowed third-party sellers to sell and reference their products
side-by-side with Amazon’s item. The world thought how can Amazon cannibalize
its own sales? However today they stand corrected as it was a strategy to offer
Long Tail products (products which are lesser in demand) at lower cost.
Using
methodology of choices and consequences as popularized by Ramon Casadesus –
Masanell and Joan E Ricart of Harvard Business School,
Amazon’s business model can be dissected into a number of virtuous cycles as at
Exhibit 2.
Exhibit 2: Virtuous Cycles of Amazon’s Business
Model
Virtuous
Cycle 1
Virtuous
Cycle 2
Virtuous Cycle 3
If one
investigates a little more into the underpinning of business strategy of Amazon
behind its imposing business model, one can discover an astitutely built and integrated
innovation magic driving the business (Exhibit 3).
Exhibit
3: Amazon’s Innovation Magic
Rewriting Rule of the
Game
Amazon
has rewritten the rule of the game. While many firms are trying to use Web
platforms successfully; very few made real money. Amazon stands out tall
demonstrating what can be done and above all, how difficult at the same time
real web commence success could be. Amazon is so embedded in the habits of
customers that it is impossible to copy it.
Amazon
now accounts for more than 40 percent of online commerce transacted in the USA but its
most impressive feat is its miniscule operating profit margin — just 2.47
percent for its most recent quarter. (Compare that to Google’s 33
percent Apple’s 31 percent, and Microsoft’s 39 percent.). Amazon forces a
competitor to fight in the gutter over margins that are rounding errors for
others.
Amazon’s disrupting many
industries and making everyone sit up and take notice as to how Amazon will
affect their business.
Amazon
Disrupts the Publishing Industry
Amazon
is jumping headlong into the business of creating content because, more than
any other company, it has the potent combination of a massive base of customers
and the vast technical underpinning with which to bring those customers new
ways of consuming books, movies, and television programs. Amazon's Kindle
family of electronic reading devices gives it the ability to offer books in a
way that hasn't been available before. Amazon Vine™ invites the most
trusted reviewers on Amazon to post opinions about new and pre-release items to
help their fellow customers make informed purchase decisions.
Amazon
is trying to change the rules in Hollywood as
well
The
Company is creating a new model for making movies and television programs,
tapping its vast Web presence to crowdsource concepts. Anyone can upload a
screenplay or television pilot script to the Amazon Studios Web site, where
Amazon and the community it's developed weed out the weakest and refine the
most commercial, before the company commits significant financial resources to
production.
Amazon
Disrupts the Brick & Mortar Stores “Showrroming”
The
Price Check by AmazonApp is designed to let users compare prices with
Amazon.com and its merchants when you are standing in front of a real product
in a bricks and mortar store. Products are identified by scanning a barcode,
taking a picture, speaking the product name or using text search, then compared
to Amazon prices. One can then, of course, purchase the product online.
Same
day delivery
Same-day
delivery has long been the holy grail of Internet retailers, something that
dozens of startups have tried and failed to accomplish. But with Amazon one
just cannot strike off anything. It may very well be possible that it invests
billions to make next-day delivery standard, and same-day delivery
an option for lots of customers. If it can pull that off, the company will
permanently change the rules of the game.
In Jeff Bezos Word “Customer experience includes
having the lowest price, having the fastest delivery, having it reliable enough
so that they don’t need to contact [anyone]. Then you save customer service for
those truly unusual situations”
Audacious Nexus 7 : Winner Take
It All
At the
time of finalizing this article, Amazon has shown that it treads the way nobody
even thinks of. It has announced a full
size Tablet that is aimed at creating huge discomfort for Apple. It released Nexus 7 electing a Tablet 2
inches smaller than iPad. Industry analysts believe that 7-inches will become
the dominant size in years to come. The entry level price it kept $300 - $700,
less than iPad equivalent, according to
Bezos, "…. We make money when people buy our devices".
Although
Steve Job was not known for his liking for smaller size, but Jeff Bezos move has
made Apple to think of small. It is
Amazon which is making apple to think of selling for less. Clearly Amazon is
out to set industry standard – be it product or pricing strategy or even
marketing strategy. Amazon is pushing Tablet into a market towards an industry structure
akin to what is known as 'network industry', an industry where market value is
proportionate to the value of products sold. Such market is also known as
increasing returns and the first mover, as Amazon is trying to be, becomes
'winner take all' strategist. In all probability, it will go for all out effort
to set standard of Tablet market in such a manner that it makes a delicate balance
of its narrow self-interests and industry interests.
Invisible
Curves Matter
Paul
Nunes and Tim Breene (HBR, 2011)on the basis of their decade long research
found that high performance companies go beyond usual financial curve. They popularized
the concept of three invisible curves
-
the hidden competition curve
-
the hidden capability curve
-
the hidden talent curve
While
the competition curve tracks basis of competition, capability curve tracks the
end of capability much before capabilities tend to dry up. The talent curve traces lessening of talent
in the organization and nurturing a steady supply of talent into the
organization.
Amazon
have always looked beyond financial curve and very successfully ushered in
successive industry – leading businesses in most of its endeavours.
References
1. How to
Design a Winning Business Model, Ramon Casadesus – Masanell and Joan E Ricart,
Harvard Business Review, January-February, 2011
2. Re-invent
Your Business Before It's Too Late, Paul Nunes and Tim Breene, Harvard Business
Reviewed, Jan – Fab, 2011.
3. Amazon
and the tablet market's 7/10 split, appeared in The Financial Express, September 8, 2012.
About the Authors:
|
Dr. R
K Mitra is currently the Registrar of the Indian Institute of Foreign Trade, New
Delhi, a premier business and
educational research Institute (Deemed University).
Apart from a First Class First Post-graduate in Economics, he did his MBA
from Indian Institute of Technology (IIT), Delhi. He
also did his Ph.D from IIT, Delhi in
e-Governance. He has many publications both in national and international
journals. His research interests extend from e-Business/e-Governance to
Strategy. He currently teaches ‘Strategic Management’, ‘Competitive Strategy’
and Indian Economy & Trade Policy at IIFT. As Adjunct Faculty at
ABV-IIITM, Gwalior, he
teaches International Business and e-Governance to the MBA students of the
Institute.
Email:
rkmitra@iift.ac.in
Mr.
Kumail Fazal is BE (Electronics) and MBA(IB) of IIFT. He is currently in a
business consulting firm. His research interests include studying business
models of innovative companies.
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