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If the Key to Business Success Is Focus, Why Does Amazon Work?

22 May 2019

From Working Knowledge, Harvard Business School:

Brian Kenny: In the world of computer science, Jon Wainwright is kind of a big deal. A computer language pioneer, he was the principle architect of both Script 5 and Manuscript. What makes John a legend has nothing to do with programming. Let me explain.

On April 3, 1995, Jon was in need of work-related reading material. He fired up his T1 modem and navigated the fledgling internet to the beta version of a new online bookstore. With the click of a mouse, he became the very first customer to make a purchase on Amazon.com. Fluid concepts and creative analogies, the book he purchased, never became a best seller, but Amazon took off like a rocket ship and hasn’t slowed down since. With a market cap larger than all other retailers combined, including Walmart, Amazon owns 49 percent of all online sales. In the time it takes me to read this introduction, the company will earn over $300,000. Will we ever see the likes of it again?

. . . .

Brian Kenny: The case is a great foundational piece to launch into some of the ideas [of the book]. I’m going to assume that anybody listening to this podcast has purchased something on Amazon, or watched something on Amazon Prime. I had forgotten about their modest beginnings, and just how much they’ve grown and expanded and changed… Let me start by asking you … what led you to write the case?

Sunil Gupta: As you said, everybody knows Amazon. At the same time, Amazon has become quite complex. They have grown into a business that defies imagination. That raises the question, is Amazon spreading itself too thin? Are they an online retailer? Are they video producers? Are they now making movies? In strategy, we learn everybody should focus. Obviously, Jeff Bezos missed that class.

. . . .

Brian Kenny: . . . . The case takes place in 2017. . . . Start us off by setting it up. How does the case open?

Sunil Gupta: At that point in time, Amazon had just bought Whole Foods, which was very counterintuitive. Amazon has been an online player. Why is it getting into an offline business? That was against their grain as an online player. The second thing is, food is a very low-margin category. Amazon is a technology company; its stock is going to stratosphere. Amazon had been (operating) Amazon Fresh for 10 years, and hasn’t succeeded. Why don’t they give up? That was a starting point. Of course, the case describes all the other 20 things they have done in the last 20 years and asked the question, what is Amazon up to?

. . . .

Brian Kenny: Amazon and Jeff Bezos are sort of synonymous. He’s a cult of personality there, like Steve Jobs was with Apple. Jeff’s been in the news a lot lately for other reasons, you know, personal reasons. He is probably one of the best-known CEOs in the world. What’s he like as a leader?

Sunil Gupta: I don’t know him personally. Based on the research I’ve done, he certainly is very customer obsessed. He’s focused on customer. He always says, “You start with the customer and work backwards.” He still takes calls on the call center. The culture is very entrepreneurial, but also very heart driven. I mean, the idea for Amazon Prime evidently didn’t come from Jeff Bezos, it came from a person low in the organization. He’s quick to adapt the ideas if he sees some merit in it. It’s almost a 25-year-old company that still works like a startup.

Brian Kenny: Was the original concept for Amazon … I mean, he sold books originally. Was it ever really a book company?

Sunil Gupta: I think it started more as an online retailer. Book was an easy thing, because everybody knows exactly what you’re buying. It’s no concern about the quality. His premise in the online store was a very clear value proposition of three things. One was convenience, that you can shop in your pajamas, so we don’t have to fight the traffic of Boston or Los Angeles. The second was infinite variety. I don’t have the constraint of a physical store. Even if I have Walmart, which is a huge store, I can only stock so many things. As a result, you only have the top sellers. In Amazon, I can have the long tail of any product, if you will. The third was price. It was cheaper, simply because I don’t have fixed costs of the brick and mortar store. I can reduce the cost structure and therefore I can be cheaper. Those were the three key value propositions. That’s how it started. The idea was, I’ll start with books and then move on to electronics and other things. But then of course, it moved far beyond being an online retailer.

Brian Kenny: This gets into some of the ideas in your book. I was really intrigued in the book about the notion of what kind of business are we in? Just that question alone. At face value, it looked like Amazon was a retailer. They went in directions that nobody could have imagined.

Sunil Gupta: Right. The purpose of the case was to illustrate how these are all connected. From a distance they look completely disconnected, and completely lack focus. Let’s start with how the concept evolved.

The first thing was, as I said, it was online retailer. Very soon it became a marketplace. Now, what is a marketplace? They basically allow third-party sellers to also sell on the Amazon platform, which is distinct from a traditional retailer. Walmart doesn’t allow me to set up shop within Walmart, but Amazon allows me to do that. Now, why would they do that? Simply because it increases the variety that they can sell on the platform. Therefore, consumers are quite happy with the variety of the product they can get on Amazon. Amazon gets commission without having the inventory and the capital cost.

Perhaps the most important thing about becoming a platform is that it creates what we call network effects. If everything I can buy is available on Amazon, more consumers are likely to go there. Because there are more consumers, more sellers are likely to go there. It just feeds itself and becomes a virtual cycle. That’s why there is only one Amazon. Even if I start an online retail [store] that is in many ways better than Amazon, nobody’s coming to gupta.com, because buyers and sellers are not there. That became the next phase, changing from an online retailer to a marketplace. Then it went into AWS (Amazon Web Services), and you say, “How can it go into being a technology company and compete with IBM and Microsoft?” It was competing with Walmart before.

. . . .

Brian Kenny: Let me just interrupt for a second. That’s a marked change in direction. They had always been a consumer platform. Now they’re in a business-to-business play. I bet a lot of consumers don’t even know about Amazon Web Services.

Sunil Gupta: Correct. That was not saying in a traditional sense, “This is my market.” That’s simply saying, I have this capability. There’s a demand for this capability. Can I do it?” Part of that was opportunistic, also. If you remember in 2001, the dot.com bubble crashed. If you’re a B2C company, you hedge your bets and get into B2B business. Part of that may have been luck. And then Amazon started producing hardware, Kindle, and now competing with Apple.

You sort of say, why is an online retailer getting into hardware production? If you think a little bit about it, the answer is very easy. Kindle was designed to sell eBooks as people move from buying hard copy books to downloading eBooks. The Kindle is the classic razor and blade strategy. I sell razors cheap in order to make money on the blades. I’m not making that much money Kindle, but I’m making money on e-books, which is very different from Apple’s strategy. Apple actually makes money on devices, but Amazon is not making money on devices, or at least not making huge money. Similarly, it moved into online streaming of the video content and suddenly became a competitor of Netflix. You say, “Why is a retailer becoming a competition of Netflix?” Again, if you think a little about it, the answer becomes clear. As you and I moved on from buying DVDs [to] streaming the stuff, that’s what Netflix did. They used to send the DVDs to us.

. . . .

Amazon is very good in moving with the customer. If the customer moves from buying books to e-books, Amazon moves in that direction. If customers move from buying DVDs to streaming, it moves in that direction. Now, can Amazon do it? Of course, they can. They have AWS. Netflix is one of the largest AWS customers.

. . . .

Brian Kenny: Are they leading or following? Are they creating a market? In the beginning it seemed like they created something entirely new. Now, are they anticipating, or are they just sort of reacting to what’s happening?

Sunil Gupta: It’s a combination of both. In some ways they are following the consumer behavior. [When consumers started] moving to streaming, Amazon was not the first—Netflix started the streaming thing, and then Amazon comes up with it. If you think about it, Amazon not only distributed third party content on videos, but now they have Amazon Studio. They are making movies. The competition now becomes Hollywood instead of Walmart.

You sort of say, “What has gone wrong with Jeff Bezos? Why is he making movies?” Making movies is a pretty expensive business and highly risky. Again, the key is to understand the purpose of the movies, which is to hook consumers on Amazon Prime. If you remember, Amazon Prime started at $79 dollars per year. The benefit at that time was two-day free shipping. Now, you and I are smart enough to do the math, saying, how many shipments do we expect next year, and is $79 worth it? Bezos does not want you to do that math. He basically says, “Oh, by the way, I’ll throw in some free content, some free music, some free unique movies.” Now you can’t do the calculation. Why does he care about Prime? Right now, Amazon has about 100 million Prime customers globally. Let’s say I get an average 100 dollars per year, that’s $10 billion in my pocket, before I open the store.

Link to the rest at Working Knowledge, Harvard Business School

PG has one quibble with the OP: He doesn’t think anyone “fired up his T1 modem” to look for a book in 1995.

Whenever PG used a T1 to access the internet in those ancient days, a T1 was referred to as a line. It was quite expensive and it ran 24/7/365. He always accessed a T1 through a corporate network center which operated behind locked doors inside a series of large glass boxes.

Connecting to the internet on a T1 line was silent while doing so through a modem on your desk was not.

PG realizes that Brian in the OP was probably trying to speak metaphorically, but apt metaphors tend to accurately reflect the reality of the object or action upon which the metaphor is based.

PG’s mother and sister are former English teachers, so perhaps he has some sort of recessive gene that promotes occasional bouts of rule-based overreach.

Amazon

15 Comments to “If the Key to Business Success Is Focus, Why Does Amazon Work?”

  1. “If the Key to Business Success Is Focus, Why Does Amazon Work?”

    Me thinks they’re looking at it the wrong way. Amazon does focus, it’s just not on what the OP and friends are expecting.

    And you’re correct PG, T1s were always up and used by an office – not just one desk. Funny thing is I switched from avionics to computers/networking in ’95 and 9600 modems were common.

    My boss was looking at remote managing networks for some of our customers. That is until we ran a little test where I had my system go out one of our modems, in another and remoted his desktop. Yes, today someone remoting a desktop is no big deal, but across 9600 modems it was painfully slow – to the point of taking minutes to get a mouse with a bad delay on what you wanted to click.

    Years later I remember 33.6k was the best speed I ever got out of the home modem before cable internet became a thing.

  2. I’d get an initial connect at 33.6, and sometimes even 56K, but the horrible phone lines between my house and any ISP forced the modems to keep negotiating to slower, more robust transfers

    I first got on the internet in 1987, back when it ran in text mode. But I was stuck at 2400 baud until just a few years ago when broadband *finally* became available for only $150/mo.

    After a few years my wife could tell what speed the modem made its initial connect at; she called it the “mating call.”

    • Yes, the only reason to leave that modem speaker on was to ‘hear’ if you needed to try again for a better connection!

  3. Felix J. Torres

    The OP doesn’t quite get what Amazon did with digital.
    Amazon didn’t wait to see that customers wanted ebooks and streaming (for one, both were around before Amazon existed). That would mean they were chasing an existing market.

    What Amazon did was realize where the technology was going to drive the market before it really took off. The same is true of Netflix, Tesla, SpaceX, Microsoft, Google, Facebook.

    What distinguishes all of these companies from the alsorans is they looked ahead and positioned themselves for the market to come before the market really arrived.

    Look at the Alexa ecosystem: at launch, everybody wondered “who needs an internet connected speaker”. Fast forward a few years and the answer became clear: a *lot* of people.

    The problem these people have with Amazon is they keep thinking of it as a single company when it isn’t. It is a consortium. It is a union of dozens of companies with common ownership and funding. Amazon doesn’t go out of their way to disabuse them of the notion because being misunderstood is a competitive advantage.

  4. My eyes. I read that line as “He fired up his TI modem and…”

    Speed reading when tired… Not a good mix.

  5. Terrence OBrien

    Focus? Seems firms aren’t following the slogans people outside the business make up for them.

    Next we will hear something about long-term vs short-term.

  6. You’re right about T1 lines.

    I’ve watched Amazon with fascination from day one as an example of how to start and grow a company.

    I think Amazon deliberately built a platform — (primitive) website for retail customers, tracking infrastructure, delivery infrastructure, customer focus — beginning with a technically simple product (books, which already had unique identifying numbers, an infinite long tail, and no special issues such as spoilage), intending to extend it to additional markets, which they then did, product area by product area.

    Each step used the synergies of the existing growing fulfillment system to handle some of the challenges of new products, and built out more platform as necessary to accommodate any uniqueness of the new products, while continuing to invest in increased productivity and robustness for the fundamental platform.

    None of this would have worked if they’d tried to take and maximize profits early in the process.

    As their internal platforms improved they were able to leverage them by offering, for example, cloud services and 3rd party stores. The refusal to box themselves in while keeping a firm eye on not letting their costs get ahead of them and reinvesting was absolutely key to their success, and that sort of discipline only comes when there’s a firm hand at the controls — usually the founder.

    The number of their acquisition/investment failures is quite small for a tech company with their level of diversification, and none of those were significant financially, nothing to put the company at risk. No one can be right all the time.

    I admire their discipline and willingness to keep experimenting immensely. When Bezos retires, I can only hope they’ll weather the transition well.

    • In his most recent talk, Bezos said that infrastructure was key to Amazon’s beginnings: he didn’t have to build the logistics system to move the packages, he could just use US mail and UPS, etc. He didn’t have to build the phone system for the modems, AT&T already had that handled. He didn’t have to create a payment system, the credit card already existed. And most homes had computers.

      “Infrastructure let’s entrepreneurs do amazing things,” he observed.

      I hope he chooses his successor well. No Steve “Not Invented Here” Ballmers for Amazon, please.

      • I got to see the Steve Ballmer transition up close and as personal as you can get without working for Microsoft (around the time they were thinking of acquiring Lotus Notes…)

        Not a person that was easy to work with — like a bantam bull with no use for anyone else’s opinions.

        • Felix J. Torres

          Ballmer was a promoter-type (a lot like the BPHs, determined to push what he had at hand instead of looking for what the customers needed/wanted), not quite the kind of guy you want to lead a tech company. Balmer kept chasing consumers when his primary audience should’ve been developers like it was under Gates.

          Ray Ozzie was a better fit (he gave them Azure) and Nadella is even better. He’s brought the company back where it belongs, as a tech tools leader.

          • Did he really chase customers? I still remember the article where Ballmer was irritated that Microsoft employees were using the iPod instead of the Zune. He thought if Ford employees wouldn’t drive Chevys and vice versa, Microsoft’s employees should only use Zunes.

            I would have considered it a clue that the employees were using iPods instead. At best having the iPods was research, at worst the employees had chosen them because they’d evaluated it and the Zune, and it came out on top. And of all people, the employees’ judgement should have carried weight. Ballmer seemed to think he could pull a Henry Ford, and claim people can have any color they want, so long as it’s black.

            If Nadella is the reason Microsoft gave us Visual Studio Code for web development, then he’s A-OK with me so far. I switched from Atom, which had edged out Brackets for me. VSC looks like it has become the new favorite child of a lot of webdevs.

            • Felix J. Torres

              Re: Ballmer – Why do a Zune at all at such a late stage of the digital music market? The Rio first came out in 1998, the Zune in 2006.

              The XBOX makes sense; it is a computing platform that overlaps with the PC gaming market and once Sony started bragging that the PS2 “supercomputer” could double as a home computer, they took a closer look at the market of the old MSX effort and realized there was good money there. Jumping into digital music then, ~2001, would’ve made sense. But waiting until 2006? Too little, too late.

              He was chasing Apple’s market in consumer gadgets instead of tending to the productivity tools market that is the heart of their business. Just look at the mismanagement and stagnation of Internet Explorer under Ballmer versus the rapid evolution under Gates.

              Ballmer’s other big failing was giving up on markets too early. MS pioneered a lot of today’s tech mainstays–ebooks, online video, smart phones, tablets–and gave up early on all of them. MS was often accused of lacking “vision” but it wasn’t vision they lacked, it was persistence, as he was constantly chasing the next shiny thing.

  7. I’ve said this before. Amazon is great at and for some things, but for many other things they are coasting on a general reputation for low price. For certain sorts of things their selection can’t be beat, but for other items you can source them at a much more rational price elsewhere.

    This is particularly true if you want to purchase multiple similar items and combine shipping. As an example, shop for multiple varieties of garden seeds on Amazon and then from a large seed vendor — and then from your local hardware store.

    ebooks are one place they can’t be beat.

    • Felix J. Torres

      That would be their online sales business.
      That is not all of Amazon or even the most important parts of the company. not anymore. Amazon’s consumer sales are all about account control at this point. It pays for the infrastructure investment for the rest of the empire but it doesn’t define them.

      The real money and their future is in tech, B2B, and media (AWS, Alexa, industrial supplies, and soon, satellite internet.)

      Remember the blind men and the elephant? Now imagine they were all grabbing the trunk and ignoring the rest of the beast.

    • That’s an odd calculation, over 50% of households in the US have amazon prime, and thus free shipping from amazon of any seeds. Those households are , I’m willing to bet, at the more prosperous end of the market and thus more likely to have a garden that needs seeds. Therefore I’m fairly certain significantly more then 50% of the seed buying households in the US are not paying shipping on their seeds with amazon.

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