What Business Is Amazon In?

When Amazon first launched its website, in July 1995, founder Jeff Bezos’s goal was to use the internet
to sell books at low prices. He created a virtual store with lower fixed costs and a larger inventory than
those of most brick-and-mortar bookstores. The concept quickly became popular, and Bezos realized that
consumers shopping for other types of goods might also appreciate this concept. So he began adding
dozens of categories to Amazon’s online assortment, including music, DVDs, electronics, toys, software,
home goods, and many more. Amazon’s low prices and large selection, and the convenience online
retailing provided consumers, posed a significant threat to traditional retailers like Best Buy, Toys “R”
Us, and Walmart. Five years later Amazon opened its site to third-party sellers, who could post their
products on Amazon’s site for a modest service fee.

This move was a win-win: third-party sellers increased Amazon’s assortment without Amazon having to
stock extra inventory, and sellers got access to the ever-increasing pool of consumers who enjoyed
shopping on Amazon’s site. Adding third-party sellers also transformed Amazon from an online retailer
to an online platform, which required Amazon to develop new capabilities of acquiring, training, and
managing sellers on its sites without losing control or damaging customer experience. And its competitive
set expanded to include eBay, Craigslist, and others. Other online retailers, such as Flipkart in India, are
undergoing a similar transition and realizing that this seemingly simple move from
an inventory-based model to a marketplace model requires a significant shift in the capabilities and
operations of the company.2
The introduction of iTunes, in 2001, dramatically changed consumers’ behavior as they started
downloading digital music instead of buying CDs in a store. Recognizing this trend, Amazon launched its
video-on-demand service, initially called Unbox and later renamed as Amazon Instant Video, almost a
year before Netflix introduced video streaming. Once again Amazon followed its customers and shifted
from selling CDs and DVDs to offering streaming services that required it to develop new capabilities and
pitted it against a new set of competitors, such as Apple and Netflix.

In 2011, in partnership with Warner Bros., Amazon launched Amazon Studios to produce original motion-
picture content. Suddenly it was competing against Hollywood studios. Why does it make sense for
Amazon, which started as an online retailer, to move in this direction?

Because video content helps Amazon convert viewers into shoppers. In a 2016 technology conference
near Los Angeles, Jeff Bezos said, “When we win a Golden Globe, it helps us sell more shoes.”3 According
to Bezos, the original content of Amazon Studios also encourages Prime members to renew their
subscription “at higher rates, and they convert from free trials at higher rates” than Prime members who
do not stream videos.4 Launched in 2005, Prime offers free two-day shipping for a subscription fee, which
started at $79 a year and was later increased to $99 a year. By 2017, Amazon had almost 75 million Prime
members worldwide.5 Not only does the subscription fee generate almost $7.5 billion in annual revenue
for Amazon, but Prime members also spend almost twice the amount of money than other Amazon
customers do.6 In addition to creating loyalty among Prime members, original
content is also a means of attracting new customers. In 2015, Amazon’s CFO Tom Szkutak credited
Amazon’s $1.3 billion investment in original content as a key driver for attracting new customers to other
parts of Amazon’s business, including Prime.7 In 2017, Amazon spent almost $4.5 billion on original video
content.8
But Amazon’s business scope did not end with retailing and content. In 2007, Amazon released the Kindle,
almost three years ahead of the iPad. Now Amazon, which started as an online retailer, was in
the hardware business. The Kindle was designed to sell ebooks as consumers shifted from physical
products to digital goods. It is important to recognize that Amazon’s strategy for the Kindle is quite
different from Apple’s strategy for the iPad. Apple makes most of its money from hardware, whereas
Amazon treats the Kindle as a “razor,” selling it at a low (or even break-even) price in order to make
money on the ebooks, which would be akin to the “blades.” As consumers started spending more and more
time on their mobile devices, Amazon launched its own Fire phone in July 2014. It failed to gain traction,
but was pursuing that market a mistake? Perhaps. However, the upside from a successful launch would
have been enormous. More recently, Amazon launched additional devices: Dash buttons,
which let users order products from over a hundred brands when users’
supplies get low, and Echo, a voice-activated virtual assistant, which can be used to stream music, get
information, and of course, order products from Amazon in an even more convenient fashion.9 Echo was
launched in November 2014, and within two years Amazon had sold almost eleven million Echo devices
in the United States and developers had built over twelve thousand apps or “skills” for this device. As
voice increasingly becomes the computing interface for consumers, Amazon is well positioned
with Echo.

Amazon also started its own advertising network, which put the Company squarely in competition with
Google. Amazon’s large customer base, and more specifically the company’s knowledge of consumers’
purchasing and browsing habits, provides Amazon with a rich source of data for targeting its customers
with relevant ads. While Google only knows a consumer’s intention to buy a product, Amazon has
information on whether or not a consumer actually bought a product on its site—highly valuable
information for product manufacturers, which is encouraging them to shift digital advertising dollars to
Amazon. This shift has allowed Amazon to generate almost $3.5 billion of ad revenue in 2017.10 But an
even bigger goal for Amazon is to replace Google as a search engine for products, so that customers start
their product search on Amazon rather than on Google. This would not only reduce Amazon’s ad spend
on Google but would also give Amazon tremendous market power. In October 2015, a survey of two
thousand US consumers revealed that 44 percent go directly to Amazon for a product search, compared
with 34 percent who use search engines such as Google or Yahoo.11 Eric Schmidt, Google’s executive
chairman, acknowledged this shift. “People don’t think of Amazon as search,” said Schmidt, “but if you
are looking for something to buy, you are more often than not looking for it on Amazon.”12
Perhaps the most controversial choice was Bezos’s decision to enter the cloud-computing market with the
launch of Amazon Web Services (AWS). Suddenly a completely new set of companies—for instance,
IBM—became Amazon’s competitors. What is an online retailer doing in cloud computing? AWS helps
Amazon scale its technology for future growth. It allows Amazon to learn from other e-commerce players
who use its platform. And it enables Amazon to leverage and monetize its excess web capacity. Effectively
AWS is a way for Amazon to build its technology capability to become one of the largest online players
and monetize that capability at the same time.
However, this was certainly a risky move and many experts questioned Bezos’s decision. A 2008 Wired
magazine article criticized this decision. “For years, Wall Street and Silicon Valley alike have rolled their
eyes at the legendary Bezos attention disorder,” wrote Wired. “What’s the secret pet project? Spaceships!
Earth to Jeff: You’re a retailer. Why swap pricey stuff in boxes for cheap clouds of bits?”13 Bezos had a
pithy response to AWS critics: “We’re very comfortable being misunderstood. We’ve had lots of
practice.”14 In the fourth quarter of 2017, AWS generated over $5 billion in revenue, representing annual
revenue of more tan $17 billion and 43 percent year-over-year growth.15

Amazon’s success in broadening the scope of its business while continuing to focus on consumer needs is
undeniable: Since its inception, Amazon has grown at a staggering pace, with almost a 60,000 percent
increase in its stock price.

Define Your Business Around Your Customers, Not Your Products or

Competitors

Amazon’s varied products and services, and the company’s correspondingly numerous and varied
competitors, can be seen at a glance in figure 1-1. As an online retailer, Amazon competes with Barnes &
Noble, Best Buy, and Walmart. As an online platform, Amazon competes with eBay. In cloud computing,
it battles for market share with IBM, Google, and Microsoft. In streaming services, it has Netflix and Hulu
as formidable competitors. Amazon Studios puts the Company up against Disney and NBC Universal
Studios. Its entry into mobile phones put it in the crosshairs of Apple, HTC, and Samsung.
Its ad network made it Google’s rival.

Amazon’s business and its competitors

Most companies define their business by either their products or their competitors—for example, you may
consider yourself in the banking business or the automobile industry. But it is hard to define Amazon in
this traditional fashion. Amazon expanded its scope around its Customers. Redefining your business
around customers is not limited to technology companies. John Deere, the heavy-machinery and farming-
supply company, was founded in 1837 by a blacksmith who sold steel plows to farmers.16 By 2014, the
company had $36 billion in sales worldwide and employed nearly 60,000 people.17 For decades, John
Deere had been very successful selling its heavy machinery to farmers and construction
companies, but in the early 2000s the company began adding software and sensors to its products. Its
newest farming equipment includes guided-steering features so accurate that the equipment can stay within
a preset track without wavering more than the width of a thumbprint.18
Later, John Deere formed two new divisions: a mobile-technology group and an agricultural-services
group. By the mid-2000s, John Deere had collected data from over 300,000 acres to help farmers optimize
their fertilizer use.19 Soon the company transitioned from a farm-equipment manufacturer to a
farm-management company that provided predictive maintenance, weather information, seed
optimization, and irrigation through remote sensors. The company is planning to open the platform’s
application programming interfaces (APIs) to outside developers, so that the information can be used in
new ways.20
Automobile companies, which used to see themselves as being strictly in the business of manufacturing
and selling vehicles, have to wake up to the new competition from ride-sharing companies like Uber,
which are providing mobility without the need to own or even lease a car. Now, as a defensive move, all
automakers are positioning themselves within the “mobility” business and offering their own ride-sharing
services, even though these services have the potential to reduce the demand for cars, a concern shared by
most auto manufacturers. However, these services, such as Mercedes car2go and BMW DriveNow, also
have the potential to generate interest among millennials, who may not have considered these brands
otherwise but who will do so on a low-cost, trial basis, possibly leading to greater brand loyalty in the
future.
Competition Is No Longer Defined by Traditional Industry Boundaries
It should be clear from the discussion so far that competition is no longer defined by traditional product
or industry boundaries. The rapid development of technology is making data and software integral to
almost all businesses, which is blurring industry boundaries faster than ever before. In a 2014 Harvard
Business Review article, Michael E. Porter and James E. Heppelmann suggested that smart, connected
devices—or the internet of things—shift the basis of competition from the functionality of a single product
to the performance of a broad system, in which the firm is often one of many players.21
Typically new players, either startups or companies from different industries, enter a market and catch
incumbents by surprise. Amazon surprised Google by becoming the dominant competitor in the search
market. Apple is hiring automobile engineers at a rate that is scaring the auto industry. Netflix and, more
recently, streaming services by HBO and CBS are causing concern for Comcast and other cable players.
Often incumbents leave an opening for new players by ignoring a shift in customer needs in response to
changes in technology. Netflix changed customers’ expectations about on-demand streaming, and
although cable providers eventually pursued the so-called TV Everywhere concept to allow their
subscribers to stream content anywhere, it took them several years to develop this service, and it is still a
work in progress. During a conference in late 2015, Reed Hastings, Netflix’s CEO, said, “We’ve always
been most scared of TV Everywhere as the fundamental threat. That is, you get all this incredible content
that the ecosystem presents, now on demand, for the same [price] a month. And yet the inability of that
ecosystem to execute on that, for a variety of reasons, has been troubling.”22 Had Comcast understood the
shift in customer needs and transformed its business around those needs, it might have prevented the threat
of cord-cutting (which is cable customers
canceling their subscriptions in favor of such streaming services as Netflix, Hulu, and HBO Now).
Similarly, Uber might not have been so successful had taxi companies kept in touch with consumer needs
and provided consumers a convenient way to order and pay for taxi rides.

Competitive Advantage No Longer Comes from Low Cost or Product

Differentiation
In 1979, Michael Porter, one of my colleagues at Harvard Business School, published a landmark paper
in which he argued that a Company could follow one of two potential strategies for competitive advantage:
either by being cheaper (that is, as a low-cost producer) or by being different (with differentiated products
that command higher prices).23
This view suggested that the core competencies required to become a low-cost producer include scale and
operational efficiency, whereas a differentiation strategy requires the ability to create innovative products
and services. As the scope of a business expands and both its competition and its industry boundaries are
defined more broadly than before, a company needs to rethink its core competencies and its competitive
advantage. What is Amazon’s core competency that allows it to enter into such
disparate business areas as online retailing, cloud computing, hardware, digital advertising, media
streaming, and content creation? Although Amazon started as a low-cost player without the fixed cost of
stores, it is not product-centric knowledge that gives it an advantage of differentiation or low cost. Instead,
Amazon has mastered three skills:

• Deep knowledge of customers obtained from mining customer data. This is embedded in the
recommendation system for books and movies as well as in the introduction of new products and services.
• Back-end logistics for warehousing and shipping that could rival the logistics systems of FedEx and
UPS. With its investment in drones and now its own trucking business, Amazon is further strengthening
this part of its competency.
• Knowledge of and ability to manage technology infrastructure.

This has allowed it to become not only one of the largest online retailers but also a dominant player in
cloud computing.
These skills provide a unique advantage to Amazon, an advantage that makes it difficult for Amazon’s
rivals to compete. For example, a Deep understanding of customers and their demand patterns allows
Amazon to have a cash conversion cycle of minus fourteen days, in contrast to the cash conversion cycle
of ten days for Walmart and twenty-seven days for Target.24 (The cash conversion cycle is calculated by
adding the number of inventory days and accounts-receivable days and subtracting accounts-payable days.
Amazon reduces its inventory days by accurately forecasting consumer demand. Its accounts-receivable
days are low since it gets payment from consumers almost immediately, and it pays its suppliers in thirty
to sixty days. With a cash conversion cycle of minus fourteen days, Amazon is effectively letting its
suppliers fund its growth.) An accurate estimation of demand also allows Amazon to prestock the right
products in a particular warehouse and promise delivery of these items within two hours in that geography
through its recently launched Prime Now service.

Sunil Gupta
HARVARD BUSINESS REVIEW PRESS
A Guide to Reimagining Your Business
Driving Digital Strategy