Amazon takes vertical integration to a new level

Enrique Dans
Feb 10, 2018 · 3 min read

Amazon has just launched its own delivery service in Los Angeles and will do so soon in more cities. Shipping with Amazon will compete directly with companies such as UPS or Fedex, offering other companies delivery services. The announcement sent the shares of the two companies down in the market.

Amazon has been obsessed with vertical integration since its inception. The company’s strategy has been to develop products that meet its customers’ needs, optimize them to the limit, and then offer them to third parties to make their development and operation profitable. It did this with its warehouses, which initially it hoped it could avoid having: Bezos originally believed that he could simply place orders with publishers and book distributors and get them to send books to customers, but when he realized they couldn’t meet deliver on time had no choice but to set up his own. After establishing very high levels of operational efficiency in its warehouses, Amazon then offered companies the chance to store their products there, as well as using the company’s picking and packing services. Finally, Amazon began working on delivering fresh products, developing its own fleets of vans and personnel.

Offering its own logistics services is simply another logical step in Amazon’s vertical integration process. Once a company reaches a certain level of activity and has acquired sufficient operational experience, integrating can make sense. Providing this service to third parties is one way to try to boost volume in a business where scale is practically everything. Amazon will now try to innovate faster than its competitors in an area in which it has huge experience in issues such as drone deliveries, transoceanic and air logistics and in-home deliveries. It also has registered patents for the robotization of distribution, beehive drone towers, and even aerial warehouses to reduce drone journey times. What could be more futuristic than a big blimp flying over our heads sending drones down with our purchases? Not even the Jetsons had that!! And while Amazon is able to execute its innovation plans brilliantly and quickly, traditional competitors such as UPS are faced with immense difficulties due to strong opposition from its workforce, whose unions seem opposed in principle to any kind of operational improvement.

Amazon seems prepared to reinvent logistics through a determined process of continued vertical integration, making it the preferred option for more and more companies and customers. Essentially, this is what it did in other areas such as cloud computing: developing the services needed at the level it considered appropriate, improving them through by scaling up, and then opening them to any user to improve the cost structure and operational efficiency. Today, Amazon Web Services is a leader in cloud computing and a fundamental profit maker for the company.

Amazon is the master of leveraging experience and operational scale, combined with innovation processes that seemingly know no bounds. Its competitors are going to have to return to school and pick up some strategic management tips.


(En español, aquí)

Enrique Dans

On the effects of technology innovation on people, companies and society (writing in Spanish at enriquedans.com since 2003)

Enrique Dans

Written by

Professor of Innovation at IE Business School and blogger at enriquedans.com

Enrique Dans

On the effects of technology innovation on people, companies and society (writing in Spanish at enriquedans.com since 2003)

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