The discipline of Amazon
As an entrepreneur, I always try to learn something from successful companies. As a business educated person, I am usually surprised to find out that what I learn is nothing new, that it is something I already knew.
Let’s analyze, for example, Amazon. A company everybody loves.
Amazon sells almost everything with good prices, amazing customer experience, slick, fast, seamless. Also, ever tried the customer care? Amazing, you would not believe it is real: the email exchange has the pace of a chat, and the rep will offer you a reimbursement even you do not ask for it.
So far so good? Well. Amazon also sells Cloud Computing services through AWS. They are the market leader, ça va sans dire, and they are truly amazing: best prices, great services, way ahead of the competition. However, let me say it, their customer care sucks. Not that is bad, simply it is not at par of what people expect from Amazon. The documentation is incomplete, difficult to search and sometimes contains mistakes. If you want support, you have to pay for it, and it is not always good. If you are a startup in an incubator or an accelerator you usually get an account manager and a solution architect assigned to you. Nice, right? Except that they change every two months, so they are just a waste of time. Should I continue? I seem too harsh? Possibly but I am not. So why every startup loves AWS? Well, because they are cheap and deliver excellent value for money.
What’s going on here? Am I suggesting that Amazon is doing something wrong? Ok, it is time to look away from Amazon for a second, let’s look at some other companies. Let’s look for instance at Apple, Southwest Airlines, and Nordstrom. A tech company, an airline and a fashion retailer? What do they have in common? A lot: people love them; they are in the top ten list for net promoting score, and they get above average profit. They are truly market leaders. However, Apple is a product leader: they have the most advanced technology and they market it well. Nordstrom is a champion in customer intimacy: they have vast choices and great sales persons there to helps you. Southwest maybe doesn’t give many frills but offer the best price for their service: they master the operational excellence.
Product leader, customer intimacy, operational excellence? If you have not got it yet, I am talking about the Treacy-Wiersema value disciplines popularized in 1995 book “The Discipline of Market Leaders”. In their book, Treacy and Wiersema stipulate that there are three different discipline that deliver value to the customer:
- Product leadership means that the company is always ahead of the competition in term of product quality and perceived value and is not scared to cannibalize an existing product to introduce a new better one.
- Customer intimacy means that the company knows very well the needs of his customer and goes an extra mile to serve them. This means carrying an extensive inventory, providing personalized services and having a very advanced customer care.
- Operational excellence means that the company is focused on making their operation the best to deliver value at the lowest possible price.
Treacy and Wiersema explain that market leaders decide on which of the mentioned one they compete and focus on being the best in that discipline while being “industry standard” on the other two.
They also make clear that each company could compete only in one of the discipline due to the specific skill set required for each one. They state, for instance, that employees could move from one company to another that operates in different industries but same value discipline without problems while moving to different value discipline could be a challenge. A real example of this issue is Ron Johnson, VP of retail operations at Apple and CEO of J.C. Penny after that, who was fired after a little more than one year after sinking J.C. Penny profits.
Ok, so what about Amazon? Amazon offers a broad range of services from eCommerce to cloud computing to both consumer and business. However, as we have seen, it seems to contradict Treacy and Wiersema being both focused on operational excellence and customer intimacy. Also, Amazon is well known to be a number-driven company. Being number-driven it is not a symptom of operational excellence but it is for sure a clue.
It starts getting muddled, right? Let’s clarify a couple of things about the “Value Discipline”. The first and most important point is to understand which is the meaning of industry standard: even though industry standard means you have to be on par with the competitors, it actually requires you to be better than your competitor to be ahead of them in your value area. Think of the complex operation and logistic chain that Apple put together to produce their products. The complexity is on par with the one of operational excellence leader, but the purpose is delivering an excellent product at high price. The second important point to understand is that from the selected Value Discipline follows a specific company structure and operating model: even though it is easier to devise an operating model focused on just one Value Discipline it is possible to create a model that fit well in two discipline. The last point to notice is the relation between discipline and customers: Choosing a customer segment to serve means choosing a discipline and the other way around.
Ok, now we have the framework to understand the discipline of Amazon. As one of the first online retailers Amazon faced a credibility issue; their bet to solve the issue was to focus at first on books, a category of products relatively cheap but with high differentiation and possibility of repeating purchase (of different books, obviously). Choosing a customer value discipline seemed the best bet. Sustaining this operating model proved to be difficult at the beginning due to the complexity of the fulfillment chain. Amazon had to focus also on operational excellence on the logistic side, and this influenced the internal culture. Amazon move to cloud computing focused more on operational excellence (consider the pledge to reduce the prices regularly along with cost reduction). Probably they saw an opportunity in doing so for many reasons: IT is usually perceived more as a cost center then a resource; IT was a considerable cost for tech startups before AWS. Furthermore, they were already focused internally on operational excellence in the IT area. Is it customer intimacy lost? No, AWS provides the highest number of choices in server instances and a range of managed services that the competitors do not provide.
So the discipline of Amazon is actually to work both on Operational Excellence and Customer Intimacy with adjustment made to the mix in order to better fit the market they are operating in. Could they do better? They could be a leader in all the three discipline? Well, they tried with the Fire Phone but they failed. Why they failed is, in my opinion, both a failure in product development and of company culture, they pushed themselves in an area in which they do not have any competence. At the same time, they are dipping their toes in TV series production with Amazon Production, and they are going after quality productions with some successful series like Transparent that won two Golden Globes. Will we have a leader in all the three discipline? This is still an open question.