Amazon: Taking over the (Retail) World
Amazon is the undisputed leader in the competitive e-commerce space by providing customers with a huge selection, low prices and unparalleled convenience. It is able to do this through aligning its processes, investments and culture to its customer value proposition.
For anyone who experienced the frenetic shopping over the Black Friday weekend, it’s likely you visited Amazon, whether to browse, research or buy. Amazon has overtaken Walmart as the largest retailer on the planet, with $90bn of sales in 2014, over 220,000 employees, and 244m active users. With a vision to be ‘Earth’s most customer-centric company’, Amazon is revolutionizing retail and customer expectations of shopping.
Amazon’s retail business model is actually quite simple, with three core tenants to its customer promise: (1) a huge selection of products (over 350m SKUs!), enabled by online that allows almost limitless inventory, and its Fulfilment by Amazon (FBA) model; (2) the lowest prices; (3) unparalleled convenience – making sure that customers find the best deals effortlessly, and providing customer-orientated services such as Prime, one-hour delivery, and even drones. Amazon has achieved all this through tight alignment between its business and operating models:
Company scope and investment in facilities
In addition to selling its own products, Amazon stores a third-party seller’s inventory in Amazon’s fulfillment centers (FCs), and picks, packs, ships and provides the customer service for these products. Named FBA, this partnership allows Amazon to increase its selection exponentially, without tying its own money in inventory. When a customer orders an FBA item and an Amazon-owned item, both are shipped in one box – a huge efficiency gain. Another valuable byproduct of FBA is that instead of sellers worrying about competing with Amazon, by allowing sellers to access its FCs, Amazon offers them access to infrastructure they could never replicate on their own.
Skeptics of Amazon’s business model argue that despite its 30%+ p.a. revenue growth, Amazon struggles with profitability. Amazon has made a strategic decision to prioritize growth over profits to sustain its competitive advantages. It has invested heavily in FCs and logistics, with over 70 high-tech FCs and sorting facilities across the country. In the world of e-commerce, these expansive physical assets can create insurmountable barriers to entry, allowing Amazon to provide faster, cheaper services to a wider audience.
Finally, Amazon is starting to vertically integrate by building its own logistics and transportation network to rival incumbents like UPS and Fedex. By cutting out third-party vendors, Amazon can have more control over its shipping times and expenses and pass those savings onto customers.
Robotics technology
Investments in facilities allow Amazon to build economies of scale, deliver low costs, and provide convenience and the best customer experience. FCs must also operate in a new way to fulfill the precise delivery-date promise of Prime; leveraging technology and innovation to automate much of inventory replenishment, placement and pricing. Amazon Robotics automates FC operations using various methods of robotic technology including autonomous mobile robots, sophisticated control software, depth sensing, and object recognition, making the process much more efficient and accurate than the traditional method of having human workers travelling around the warehouse locating and picking items – have a look at the video below to get a behind-the-scenes peek at an Amazon FC!
https://www.youtube.com/watch?v=zknLfU7GJIw
Lean and culture of continuous improvement
But it’s not like humans are completely gone. Another key to Amazon’s success is the use of lean principles to ensure that money is only spent on things that matter to customers. Cost-consciousness is in Amazon’s DNA. For example, under the lean princip
le of automation, humans are still kept for high-value, complex work while machines automate the basic, repetitive, low-value steps in a process.
The Kaizen philosophy of continuous improvement is also at the fore, especially as it relates to people and processes. There is strong engagement of the frontline on continuous improvement. For example, if a customer complains to a customer-service agent of a defect, the agent is empowered to ‘stop the line’ – i.e., pull the andon cord and take the product off the website until the defect is fixed. This empowers frontline workers and eliminates tens of thousands of defects, leading to increased customer satisfaction. Every employee, even Jeff Bezos, spends at least one day a year working in a customer services role. This allows employees to see events on the frontline, understand problems that come up, and help find solutions to be truly customer-centric.
In an example of continuous processes improvement, Amazon has created 100,000 temporary jobs to help with peak holiday demand this season. This should improve on-time delivery of gifts, something it struggled with last year after a late surge in holiday sales.
The road ahead?
How much further can Amazon grow? This question is top-of-mind for most industry observers. But with its investment in facilities, logistics, and technology, and continued desire to innovate and improve, it’s hard to see how any competitor can catch up…
Sources
Amazon Annual Reports and Investor Presentations
http://www.mckinsey.com/insights/operations/when_toyota_met_e-commerce_lean_at_amazon
http://www.businessinsider.com/photos-amazon-distribution-warehouses-and-operations-2014-3
http://www.wired.com/2014/06/inside-amazon-warehouse/
http://www.slideshare.net/faberNovel/amazoncom-the-hidden-empire
http://www.digitalbusinessmodelguru.com/2013/07/analysis-of-amazon-business-model.html
http://www.engineering.com/DesignerEdge/DesignerEdgeArticles/ArticleID/6880/Amazons-Robotic-Order-Fulfillment.aspx
This sounds very interesting.
On pricing: while lowest prices might have been or still is a business model, there are other companies that provide lower prices, for example, Jet.com. Jet was founded by the ex-Amazon employee, but instead of offering fastest delivery, Jet offers lower prices in exchange for extra day on average of delivery. While there are certainly folks who need products to be delivered on the 2nd day, most of the consumers would not mind waiting another day if they can save $$. Hence, in a highly competitive online retail space Amazon faces fierce competition, and it is far from true to say that Amazon’s competition is lagging far behind.
Amazon has built a great infrastructure – that is definitely their huge advantage, but most recent spike in company’s valuation was driven by their data center processing bandwidth capabilities rather than retail business. In the video, it says that Amazon pays more than an average retailer; however, for their full-time employees, Amazon pays low salaries relative to its industry. I once interviewed with them for a strategic role, but declined because of their ridiculously low compensation – that goes without saying that the position was targeting post-MBA professionals(how do you pay for your loan????).
Additionally Company has a very poor culture. Here is an article on their culture and “Rank and Yank” system: http://www.nytimes.com/2015/08/16/technology/inside-amazon-wrestling-big-ideas-in-a-bruising-workplace.html?_r=0.
– Not sharing best practices – promotes internal unhealthy competition
– Inward focused
– Back-biting, collusion (for example, in order to protect themselves from losing their jobs, employees may collude to hire a new person only to give him/her bad reviews and therefore to fire him/her and save own jobs)
Finally, Amazon is now shifting away from retail to a more techy side, which a positive move, I believe. The question is whether their operating and business models there match…
Amy, thanks for the write-up. I’ve been following Amazon closely for years and its interesting to see your analysis.
Personally I find it suspect that Jeff Bezos can one day flip a switch and make Amazon terrifically profitable instantly without fundamentally undermining the company’s culture. Because Bezos essentially wants to penetrate and dominate every possible market available to him AND create new markets, a vast amount of Amazon’s capital and manpower is tied up in long-term projects that may or may not pay dividends for years, if not decades. To me, if the company’s strategic outcome is to own the channel for nearly every product or service for nearly every human being, I think their business and operating models are incredibly synergistic and complementary.
However, if the operating and business models are to make a very profitable company that can grow remarkably fast in perpetuity, I become concerned. The only way to instantly or near instantly become very profitable would be to reduce customer service, increase prices, and/or reduce many long-term high risk projects. There are serious risks to do any of these, as it creates strategic openings for new or existing competitors to exploit. If Amazon has grown so big that it truly owns the retail market for a vast amount of needs and wants for the global product, raising prices could trigger antitrust proceedings. Amazon could become the AT&T and Bell of yesteryear.
I would also like to get your take on how the new regulations being proposed on government internet intervention could sway their business model. Would the new requirements to treat everyone equally retrench Amazon’s competitive advantage, making them even more potent of a competitor? Or could public push back from these regulations reverse them and create paid speedways within internet traffic; how would this affect their operating model?
Great post!