When Amazon was first formed as Cadabra Inc. in July 1994, it was a familiar technology startup story: brilliant entrepreneur begins in his garage with the help of his wife and a programmer. Today its market dominance is best described by Joseph Schumpeter as “a perennial gale of creative destruction” where innovative entrepreneurs lead revolutionary business cycles of growth while destroying the value of existing companies. Internet technology inspired and enabled Amazon’s rise but its alchemy of success was catalyzed by other key elements that continue to drive its competitive advantage.
It is no small irony that Amazon’s rise started just as Barnes and Noble was still expanding and disrupting the book retailing industry by offering discounted prices with a large inventory of books in their superstores. Although growing rapidly for a startup, Amazon’s sales were still only $16 million in 1996 while Barnes and Noble realized $2 billion the same year. Amazon’s long-tail strategy allowed it to gain a foothold in the highly competitive book retailing industry where it offered more rare and out-of-print books while also selling popular books at a deep discount.
Amazon executed its strategy with an innovative business and operating model that featured pioneering ecommerce technology and a much lower cost structure than competitors. In addition, Amazon’s operating model allowed it to collect cash on a book sale before it shipped from their only warehouse generating a positive cash flow to fund expansions. Barnes and Noble executives initially offered to partner with Amazon in 1996 and after being rejected launched bn.com in 1997. By 1998 with the spin-off of bn.com, Barnes and Noble executives had already ceded the “low-end” online book market. With its superior business model now proven in a niche market, Amazon was poised to expand rapidly up-market to dominate the entire book retailing industry.
In contrast to Amazon’s market approach, Webvan’s (online retail grocer that filed for bankruptcy) spectacular failure started with implementation of its operations on a massive scale and committed an investment of $1 billion dollars in state of the art infrastructure before it had proven its market strategy at any of its pilot locations.
Amazon’s sales continued to explode reaching $600 million in 1998 and $1.6 billion in 1999 but were coupled with large profit losses of $125 million and $720 million respectively. Just prior to the dot-com crash, Amazon’s CFO raised $672 million in February 2000 from the sale of convertible bonds to European investors likely saving the company from future insolvency. The dot-com crash in March 2000 would severely test Amazon’s commitment to its forward-looking business strategy which would become central to its future success. The years 2000-2002 brought painful restructurings, high attrition, and modest growth. Amazon not only survived but with its patient long-term vision intact and coupled with an obsession to provide a superior customer experience at the lowest price before all else.
Amazon’s ensuing expansion into multiple industries showcased how its business model and platform could be successful across sector categories. Jeff Bezos’ vision for Amazon to be the retail Everything Store evolved into the Everything Platform including both consumers and businesses as customers. In the 2017 annual report, Amazon’s Web Services category which provides cloud services to businesses accounted for 9% of its total revenue and 100% of operating income. Amazon’s growth at the expense of established companies occurred at such an incredible pace and success that it spawned the Death By Amazon index. Bespoke Investment Group’s index tracks 54 retail stocks whose performance is negatively impacted by the rise of Amazon.
Amazon’s relentless innovation and drive to provide an unmatched customer experience continues to feed a revolutionary business cycle that shows little sign of abating. Its Alexa ecosystem is leading a new digital technology phase based on artificial intelligence and the Internet of Things (IoT). The Alexa ecosystem also exemplifies how Amazon continues to grow its business model to capture additional value for its customers. According a recent research report commissioned by the Technology CEO council, “The Coming Productivity Boom”, the remarkable productivity boom of the 1990s which occurred across multiple industry sectors was fueled by the integration of information technology and will be followed by another rapid productivity increase enabled by mobility, sensors, analytics, and artificial intelligence.
There is no single formula that catalyzes the success of Amazon to disrupt multiple industries but key elements enable it when the opportunity is revealed. They include a bold business and operating model capable of innovating rapidly combined with a vision and culture driven by its passion for the customer. Finally, it may be Amazon’s willingness to destroy its own established businesses that will sustain its competitive advantage. Amazon began eroding the value of one of its core sectors with the Kindle e-reader by disrupting the business it was founded on, online selling of physical books.
About the author
Guy Perry is a Principal at Alexander Julia LLC where he leads the Advisory practice.