Rating Qualities

9
Analytical
Overview
Concrete Examples

Amazon
How the World’s Most Relentless Retailer
Will Continue to Revolutionize Commerce
Natalie Berg and Miya Knights | Kogan Page © 2019

Digital leviathan Amazon racks up close to 50% of all online sales, providing millions of different
products at low prices. Amazon’s value now equals the combined value of Walmart, Home Depot,
Costco, CVS, Walgreens, Target, Kroger, Best Buy, Kohl’s, Macy’s, Nordstrom, JC Penney and
Sears. Amazon founder, CEO and president Jeff Bezos is the world’s wealthiest person. Retail
experts Natalie Berg and Miya Knights provide an in-depth examination of Amazon’s singular
complexity and global reach.

Take-Aways
• Amazon is the world’s leading consumer sales company and its second most highly valued firm.
• Amazon operates in the dog-eat-dog retail sector.
• Amazon benefits from the “flywheel effect.”
• Amazon follows 14 core leadership principles.
• The three cornerstones of Amazon’s business are its Marketplace, Prime and Amazon Web
Services.
• Thanks to its remarkably diverse offerings, Amazon is known as the “Everything Store.”
• Amazon is a retail company, but even more, it’s a technology and innovation company.
• Amazon now has too big a lead. Its retail competitors will never be able to catch up.
• Amazon’s retail competitors can’t hurt the company. But the United States government can.

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 Summary

Amazon is the world’s leading consumer sales company and its second most highly
valued firm.

Amazon dominates retail by putting customers first. It is the world’s most active product search
engine. When people want to buy something online, Amazon is the place most of them go
first. Amazon stays relevant in its efforts to deliver what customers want. It works on their terms
and according to their timetables and other requirements.

“We’re going to be unprofitable for a long time. And that’s our strategy.” (Amazon
founder Jeff Bezos in 1997)

Amazon sticks to a long-term orientation. Founder Jeff Bezos never worried about profits, an
attitude that has helped make Amazon an international force.

Amazon operates in the dog-eat-dog retail sector.

Amazon has the globe’s most comprehensive consumer database and makes good use of
its valuable marketing information about its customers – a powerful weapon for fighting hot
competition within and among its many sectors.

“The online marketplace is simply a modernized, digital version of the shopping mall –
but open 24/7 and with infinite assortment.”

In one example of the cutthroat practices that Amazon’s success generates, some rival retailers
attacked their shoppers’ smartphones with “wireless-signal jammers” so the people in their stores
couldn’t use their phones to try to find better prices elsewhere, like, for example, on Amazon.

Amazon benefits from the “flywheel effect.”

Management author Jim Collins defined the flywheel effect as a virtuous cycle in which one
successful business activity within a company enables other successful business activities.

“There is no single defining action, no grand program, no one killer innovation, no

solitary lucky break, no miracle moment.” (Jim Collins)

In Brad Stone’s book about Amazon, The Everything Store, he explains its flywheel
progression. Cheaper prices lure repeat customers. Repeat customers bring huge sales, which in
turn bring more commission-paying, third-party sellers. This leads to higher efficiencies, enabling
Amazon to get more bang for its sunk costs – such as servers and fulfillment centers – and to
charge lower prices.

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 Amazon’s constant diversification makes the flywheel spin faster and stronger. Each new service
represents an added, interdependent “spoke on the wheel.”

Amazon follows 14 core leadership principles.

Amazon’s success has much to do with its core leadership principles or priorities, which are:
“customer obsession; ownership; invent and simplify; leaders are right a lot; learn and be curious;
hire and develop the best; insist on the highest standards; think big; bias for action; frugality; earn
trust; dive deep; have backbone, disagree and commit” and “deliver results.”

The three cornerstones of Amazon’s business are its Marketplace, Prime and Amazon
Web Services.

Amazon bases its current operations and future plans on these “three pillars”:

1. Marketplace – As part of its ambition to offer “Earth’s biggest selection,” Amazon became an
internet leader in permitting third-party sellers to use its website to sell their wares. This allows
Amazon to minimize its inventory, overhead and risk. Amazon earns approximately 15% of the
purchase price of all the third-party products sold on its site. After its own retail products, the
outside sellers’ Marketplace is the firm’s next largest source of revenue – $32 billion in 2017.
2. Prime – This popular membership program is the “glue” of Amazon’s ecosystem. Prime
encourages customers to spend more, to buy more frequently and to remain loyal. The army of
Prime consumers pays about $100 per person each year for free shipping of Amazon purchases
and access to its digital entertainment.
3. AWS – Amazon’s most profitable business division is Amazon Web Services (AWS), which the
firm markets to other companies.

Thanks to its remarkably diverse offerings, Amazon is known as the “Everything

Store.”

Amazon is a vital component of the world’s online infrastructure. By 2021, it expects most of its
sales to come from its web services – cloud computing, subscriptions, advertising and financial
services – and not from selling products.

Amazon is a TV producer, publisher, fashion designer, home-security provider and cargo airline.
It manufactures hardware. It is a high-tech payment processor and one of the internet’s most in-
demand advertising platforms. It has created a worldwide delivery network. It wants to become
a bank and a health care provider. Amazon has already established a major position in food
retailing. With its purchase of Whole Foods Market, it set out to become a primary grocery
retailer.

Amazon must develop a robust offline presence by opening numerous stores, but that is part of
its ambitious vision of the future of retail as being made up of a mix of online and physical stores.

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 Amazon’s physical stores won’t have checkout lines – scanners will do that job – and will rely
on advances in mobile technology and versatile apps.

“Retail is going through a transition. The naysayers will call it an apocalypse; to others,
it’s digital transformation.”

Many observers believe that that digital firms like Amazon are destroying offline stores in a
“retail apocalypse.” But as the world’s toughest retail competitor, Amazon has a beneficial
effect on offline retailers. Its dominance forces all retailers to up their games. Those who can’t
will disappear. Brick-and-mortar stores are now working to develop a strong online presence while
many major digital retailers – including Amazon – are looking to establish offline stores.

In 2008, Amazon operated in six international markets. Today, Amazon operates in 18 non-US
markets from Mexico City to the Himalayas. International sales represent one-third of Amazon’s
total retail sales. In 2018, Amazon owned or rented more than 250 million square feet of space
worldwide.

Amazon is a retail company, but even more, it’s a technology and innovation company.

As an innovation leader, Amazon devoted more than $20 billion to R&D in 2017, leading all US
firms.

“When retailers talk of innovation, they tend to mean things like pop-up stores and
digital displays. With Amazon, it’s underwater warehouses and robotic postmen.”

In 2015, Amazon applied for an unusual patent on delivery trucks that feature an internal 3D
printer so drivers could manufacture goods and deliver them to waiting customers.

Amazon has made drone delivery a commercial reality. Bezos announced in 2013 that Amazon
would dedicate itself to drone technology. In 2016, Prime Air successfully managed its first
fully automated drone delivery in Cambridge, England. From “click to delivery,” that first drone
delivery took only 13 minutes.

Amazon doesn’t do everything perfectly. In 2014, it introduced the Amazon Fire phone, but
consumers and the media hated it. A month after its introduction, Amazon cut the Fire phone’s
price from $199 to to 99 cents. In 2015, Amazon announced it lost $170 million on the Fire phone.

Nor are all of Amazon’s policies enlightened or acceptable. Social activists criticize its work rules,
working conditions and the salaries of its warehouse employees. In 2013, German unions issued
strike calls against Amazon to raise the pay of warehouse workers.

Amazon now has too big a lead. Its retail competitors will never be able to catch up.

Today’s customers demand “on-my-terms” shopping, which drives Amazon’s plans and actions.

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 “Amazon’s very existence impacts every single retail business. They are hands down the
most disruptive retailer in the Western world.”

Other retailers can never catch up with Amazon and its digital ecosystem, particularly not
those laden with unprofitable brick-and-mortar stores and poorly integrated e-commerce
channels. Amazon’s amazing digital ecosystem and access to vast capital are pretty much not
replicable.

Amazon’s retail competitors can’t hurt the company. But the US government can.

Amazon’s dominance makes it a target for antitrust regulation based on laws designed to protect
consumer interests against monopolies. According to “Amazon’s Antitrust Paradox,” a Yale Law
Journal article by Lina Khan, Amazon’s saving grace is its “missionary zeal for consumers.”
Amazon sets out to deliver low prices, superior customer service and consumer value.

“Amazon, as best I can tell, is a charitable organization being run by elements of the
investment community for the benefit of consumers.” (Vox executive editor Matthew
Yglesias in 2013)

According to the online software and services firm Profitero, Amazon adjusts its prices more than
2.5 million times daily. That makes it an unlikely target for government regulation or legislation,
even though government antitrust activity – and not Amazon’s competition – could pose a
legitimate threat. As Amazon continues to grow and dominate, government overview is certain to
increase.

About the Authors

Natalie Berg founded NBK Retail, a retail strategy consultancy specializing in retail
strategy, changing shopping habits and future trends. She also co-authored Walmart. Miya
Knights heads Eagle Eye Solutions, owns Retail Technology magazine and is one of Vend’s top
50 retail influencers.

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