Amazon: Born from Customer Obsession and Digital Innovation

How has Amazon infused digital technologies into its growth strategy?

Amazon has been a game changer across many different industries by leveraging digital technologies to consistently evolve and grow, regularly building on previous progress. The initial core values for the company laid out in its initial 1997 Letter to Shareholders accurately reflect its vision for achieving success through relentless customer obsession and a focus on long term growth by leveraging technology and accurate metrics. [1] Interestingly, Jeff Bezos couples the ideas in this letter with a focus on everything being Day 1, meaning that they must always think about growing, innovating, and delivering/capturing customer value as though the company was just beginning and do so in a systematic, measured manner. This commitment is reiterated throughout the company and to shareholders as exemplified by the fact that the initial Letter to Shareholders from 1997 has been included in every annual report since then. Digital technologies and innovation are part of Amazon’s DNA.

What did Amazon do differently?

Remember getting textbooks at the book store or being frustrated when you couldn’t find a particular book you needed at the library? Amazon’s first step was to disrupt the business of selling books, providing an avenue for customers to search for and buy their books online and then receive them in the mail. The convenience and low cost of this caused a significant amount of trouble for brick and mortar book stores. Amazon didn’t stop there, but instead began spreading into other markets by selling appliances and many other items through the same online portal, Amazon.com. It went further by leveraging the digitization of physical items like books, movies, and music through offerings like downloadable books, Amazon Prime Music, and Amazon Instant Video. This allowed Amazon to offer a wider range of selection for customers while consistently cutting down costs, like inventory and warehouses. Take the Star Wars Force Awakens movie where a standard Blu-Ray costs around $35 while a digital download of the same movie costs $20 in HD [2]. Furthermore, customers can stream the content meaning that they can access it anywhere as long as they have an internet connection.

How did Amazon do this?

Amazon delivered content to users where they wanted it and how they wanted it in a fast and cost effective manner. On top of this, they learned from customer behaviors and helped customers through either suggestions or by providing further means to access content through a single platform. Amazon has consistently expanded the way that customers can access its services. The platform initially leveraged the early Internet to connect buyers to its offerings, eventually broadening this to connecting buyers to other sellers/vendors through the same channel. As it grew, it began to leverage cloud technologies and economies of scale for its underlying infrastructure, which kept costs to a minimum and allowed them to rapidly scale without sacrificing quality or pricing for customers. Gradually Amazon moved onto mobile phones, tablets, and other technologies that allowed users to use Amazon whenever they wanted. Amazon would also relentless monitor and track metrics around its performance in all areas, constantly seeking to improve speed, accuracy, and cut costs. The impact of all of this work can be seen in the growth of Amazon as well as how they have grown compared to other retailers in terms of cumulative percentage change in market cap and their size as depicted in a Wall Street Journal article (screenshot below). [3]

Amazon further used technologies such as Machine Learning to provide customized and tailored experiences for customers. Usage of the site would be tracked and algorithms on the backend would be run, which would return product suggestions or recommendations based on past behavior or other similar customers. Amazon would also use this information to optimize its site designs and structures. In a unique show of further customer support and transparency, Amazon has also been providing access to these technologies to the public through its Cloud offerings. [4]

Keeping the Pace

As new digital technologies have continued to be developed, Amazon has sought to stay on the front end of this wave. Amazon’s “Internet of Things” button is an example of their commitment to reach customers directly as it provides a simple “buy” button that you can stick on to a washing machine (for example) and press whenever you run out of detergent. [5] As it grows, Amazon needs to keep pushing the envelope by building, adapting, and implementing new solutions enabled by technology. Drones for delivery, Alexa, and distribution center automations are other recent examples of these endeavors. A critical area of focus should be on creating seamless platform that facilitates and eventually fully anticipates needs through Machine Learning and customer analytics, while focusing on cutting costs through economies of scale, renewable energy solutions, and other efficiencies.  (799 words)

 

[1] Bezos, Jeff. “1997 Letter to Shareholders.” http://media.corporate-ir.net/media_files/irol/97/97664/reports/Shareholderletter97.pdf

[2] Star Wars Force Awakens Amazon Page: https://www.amazon.com/Star-Wars-Force-Awakens-Theatrical/dp/B019G7X9E6/ref=sr_1_2?s=instant-video&ie=UTF8&qid=1479502047&sr=1-2&keywords=force+awakens

[3] Prince, Marcelo and Slobin, Sarah. “How 20 Years of Amazon Changed Retail.” http://www.wsj.com/articles/how-20-years-of-amazon-changed-retail-1436998020

[4] Finley, Klint. “Amazon Giving Away The AI Behind Its Product Recommendations.” https://www.wired.com/2016/05/amazons-giving-away-ai-behind-product-recommendations/

[5] Richman, Dan. “Testing Out Amazon’s ‘Internet of Things’ button: Infinite possibilities, requiring infinite patience.” http://www.geekwire.com/2016/testing-amazons-internet-things-button-infinite-possibilities-requiring-infinite-patience/

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8 thoughts on “Amazon: Born from Customer Obsession and Digital Innovation

  1. Dear Walter,
    It was super interesting to read your blog. Yes, as you said Amazon started from addressing consumer’s inconvenience in brick and mortar book store, and expanded to a wide range of industries. Now it became a Kingdom I would say. I was always curious what is Amazon’s secret sauce, and it was great to learn it through your blog : Leveraging economy of scale for its infrastructure and relentlessly focusing on consumer’s diverse needs to create perfect satisfaction. It was helpful and exciting to read. Thank you.

  2. Great post, Walter. I agree that Amazon did a great job in disrupting the retail business and offering a complete new experience for the customers. Leveraging machine learning to even better understand the customer is the right direction. However, one move I don’t understand is the opening of brick and mortar stores, which you probably heard of. They plan to open 100 stores in the US (http://www.businessinsider.com/amazon-big-expansion-retail-pop-up-stores-2016-9) but isn’t that against their core strategy of being digital and available everywhere? They might wanna follow the idea of an Apple Store, but I don’t see Amazon as a hardware provider that needs to show/explain its products to customers.

  3. Interesting article Walter, especially the “Keeping the Pace” section. Amazon was truly one of the giants who accelerated digitization. However, every company that is jumping on the digital venture should keep costs in mind. Amazon’s net shipping costs are increasing exponentially with more people joining Amazon Prime feature. Net shipping costs in 2015 were more than $5 billion, up 19% from $4.2 billion in 2014 (see: http://www.geekwire.com/2016/amazons-net-shipping-costs-top-5b-for-first-time-fueling-push-to-build-out-its-own-delivery-network/). Amazon needs to get on top of this issue very soon. One possible disruption to Amazon’s model is an eventual rise carpooling companies (such as Uber or Carpooling.com) who are going to use their flexible work-staff to deliver packages more efficiently.

  4. Walter, thanks so much for the post. Appreciate your perspective on Amazon.

    I have a few questions on Amazon’s strategic approach to growth and next-gen technology. It almost seems like they are throwing darts and seeing what sticks. As you mentioned, Amazon is investing in drone technology to revolutionize delivery, Echo/Alexa and other consumer IoT, IT-enhanced distribution, improved product suggestion via deeper learning, etc. Amazon faces competitors in each of these areas, and it makes me wonder whether Amazon is unsure of where the most valuable growth will be created and so they are going after everything. If I had an idea on which project out of the above would create the most value for my customers, I would invest much more in reaching completion of that goal. Granted some of these applications may complement others, I can’t help but question the breadth of product exploration happening at Amazon.

    Nonetheless, it’s pretty amazing to see how bullish Bezos is on AI (http://www.geekwire.com/2016/amazon-poaches-ebay-chief-continues-ramping-machine-learning-operations/) – do you think they should have competed with Apple and ultimately acquired Turi? Found it odd that Apple acquired given Amazon’s relationship with the University of Washington and the $2mm the firm donated for AI professorships.

  5. Thanks for the interesting post, Walter. Amazon is a great case study of how technology and digitization has been harnessed to provide more value for customers and certainly cannot be covered comprehensively in 800 words. It seems as though Amazon’s own business model and organization have changed the more it has embraced technology. For example, you mention that Amazon’s original business model was to provide books/textbooks cheaper by selling directly to customers online. While that model remains core to Amazon’s operations (i.e., direct-to-consumer selling of virtually any product via Amazon.com), Amazon’s revenues and profits appear to come from other channels like the cloud, as you allude to in the post. According to the NY Times, Amazon Web Services (“AWS”) now accounts for approximately one-third of overall company revenues and over half of operating income as the most popular cloud service for start-ups and outsourced IT service for bigger companies. (Source: http://www.nytimes.com/2016/04/29/technology/amazon-q1-earnings.html?_r=0) Additionally, Fulfillment by Amazon (“FBA”) is another evolution and iteration of the company’s business model. FBA required the addition of warehouses, inventory management software, myriads new employees, acquisitions of robotic technologies, and now leases of 40 cargo planes as part of Prime Air. (Source: http://www.wsj.com/articles/amazon-reveals-prime-air-cargo-jet-1470378818).

    As you mention in your article, Amazon will continue to leverage technology and reiterate its importance in the business. As they do that, the business model is likely to iterate as well as Amazon continually looks for more ways to create for and capture value from its customers.

  6. Walter nice post! I would love to get your perspective on Amazons future strategy. Fabian asked the question of why Amazon is opening up these pop up stores. Having visited the popup in San Francisco I see the value in allowing customers to try out Amazon products like the Kindle Fire and Alexa, but I question their interest in building hardware to begin with. It seems like ideas like the Amazon locker (and improving digitization of these) are more inline with their primary customer promise. I wonder if they should partner with a company that has a name brand in hardware but doesn’t have the network advantages which Amazon has.

  7. Dear Walter,
    Thanks a lot for your wonderful blog post on Amazon — it was an interesting read indeed. I was particularly curious to understand the economics behind Amazon’s business model and what role does technology play in Amazon’s future plans. It was interesting to read about the IoT enabled growth that Amazon wishes to capture. As there is a fierce competition raging between Amazon and Flipkart (Indian e-commerce giant started by former Amazon employees), it would be interesting to see how these two companies employ the IoT to outsmart the competition.

    Regards,
    EK

  8. Hi Walter. Thanks for this post.

    I’m intrigued by Amazon’s original decision to build the Kindle. Amazon rightly saw that its core product at the time, books, could be delivered more effectively electronically. Yet, it was still quite a risk for the company to build out a hardware team to develop the technology required for the Kindle. The company had been focused on just shipping books and other physical items up until that point. In hindsight, the Kindle has been a massive success, but it must have been a momentous decision for Amazon to go so far out of its comfort zone. The decision reminds me of the TOM case on IKEA and whether it made sense for IKEA to buy its own forests (and thus radically change its existing operating model) to ensure a more reliable supply of sustainable wood for its products.

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