In finding and using new growth properly in a recession, a company needs to focus on its customers, look ahead to the long term and make profitable innovations. Amazon’s 26 years of sustained growth confirms that these principles work firmly in both growth and decline.
Michael Porter has convincingly shown that differentiation is a prerequisite for a company’s profitable growth. This can be learned from the best companies that have grown successfully in both growing and declining economies. One of them is Amazon.com, which always follows three principles when making strategic choices.
Amazon founder Jeff Bezos says that if you want to know why Amazon is different from everyone else , it’s because: “We are genuinely customer-centric, we are genuinely long-term oriented and we genuinely like to invent.” These principles have been in force since the founding of the company, when it started small, so both small and large businesses can learn from them.
Amazon’s mission is to be the most customer-centric company in the world . Bezos emphasizes that while many people tend to talk about customer focus, in reality they do not, but mostly focus on their competitors. In contrast, customer focus makes you tink about customers, get to know them better and commit to them. In addition, customer focus gives the strategy stability, which allows the company to systematically increase its experience, go deeper into the knowledge of both customer needs and technologies, and thus become the smartest and best for its customers on the market.
At present, the biggest mistake would be for a company in a declining sector to exchange its old customers for new ones, as this would mean starting a new business with little to do with the company’s previous experience and differentiation. For example, a clothing industry that started to produce scarce protective masks during the coronary crisis may be able to make a profit in the short term, but it can hardly compete successfully with companies that are experienced in protective mask technologies.
The third great value of customer focus is that it leads to the creation and recognition of the company’s flywheel. The flywheel is formed by the successive results of the company, and the continuous improvement and pushing of each of them (thousands and thousands of times) gives the impetus to the growth of the company.
Jim Collins has found that the flywheel of successful companies is mostly based on four to six succesful steps. A strong flywheel is based on the customer’s needs, responds to the company’s passion, clearly states in which the company is the best in the world, and certainly includes economic success or a resource engine.
In the fall of 2001, when the internet bubble burst, Amazon’s leaders decided the main thing they were very good at and drew more or less the next flywheel. Lower prices led to more customer visits. More customers increased the volume of sales and attracted more commission-paying third-party sellers to the site. That allowed Amazon to get more out of fixed costs like the fulfillment centers and the servers needed to run the website. This greater efficiency then enabled it to lower prices further. Feed any part of this flywheel, they reasoned, and it should accelerate the loop.
The recognition of the flywheel caused a lot of excitement in the management, because for the first time the top managers had an understanding of what Amazon really means. Gaining clarity on the flywheel encouraged Amazon to boldly invest and grow in a situation where most companies were indecisive by the stock market crash. The Amazon flywheel has remained the same so far and explains the reasons for the company’s extraordinary success. It is worth adding that when one top manager wanted to introduce the flywheel to analysts, Bezos did not agree, as he considered the flywheel to be a secret part of the company’s formula for success.
This means that the successful growth of companies is based on continuity, not on one-off radical actions, as the results of the latter are usually short-lived and do not allow the company to stand out permanently. One of the most curious examples here is General Electric, whose 1980-2000 The successful growth of the 1990s was destroyed by Jeff Immelt in 2001-2017. years due to its botched strategy.
Bezos’ goal is to increase the long-term value of the company, not just to achieve short-term success in 2-3 years, which he believes most companies focus on. For example, when 30-year-old Bezos considered founding Amazon, he imagined himself to be 80 years old, who will not have to regret not making timely decisions. Looking from the distant future to the present gives two good things – firstly, the understanding that if you want to do something big, you have to make risky decisions now, and secondly, time distance increases courage and rationality. Greater courage and rationality are very important, because people tend to avoid risks in uncertainty and to make biased decisions or to avoid decision-making.
It is important to understand that a good strategy is not to invet the success, as is usually the case – just to draw up a vision, annual targets, budget and market share projections, as they do not show the way to improvement. A good strategy is born from realizing a new market opportunity and using it in the right way. Developments in technologies, customer preferences, laws, resource prices, etc. create new opportunities.
When Amazon had a burning need in 2000 to create its own purchasing environment for third-party sellers, it proved extremely difficult for them to create a single platform. It was realized that operating systems would go online in the future. Thus grew the radically new Amazon Web Service (2002) and, in turn, cloud computing (EC2, 2006), in which Amazon is still a powerful market leader .
Seeing the synergy of the iPod (2001) and iTunes (2002) in the market, Bezos came up with the idea of an e-book in 2004, which led to the launch of the first e-book, the Kindle (2007), which also became the market leader. Seeing the thriving development of self-propelled cars, Amazon acquired Zoox, a highly innovative and environmentally friendly self-driving car developer, in June this year, to significantly reduce its transportation costs in the future. These and other Amazon examples confirm that noticing and using new opportunities appropriately enables a company to grow successfully in both growth and recession.
The COVID threat and the resulting restrictions have created several new growth opportunities for companies, as customers value much more savings and new values, such as e-commerce, e-communications, healthcare, and so on. Lower prices can be provided by IT solutions that improve the quality and efficiency of processes.
Even before the coronary crisis, it was known that flexible remote work was much more productive than office work, and it gradually spread. However, due to the COVID crisis, many companies have experienced it, and now almost half of companies plan to increase the share of remote working, either full-time or flexible ( 47% and 43% respectively ). Similarly, the cloud business grew 11% in the second quarter, with the U.S. economy down 32.9%. Noticing and expoliting the potential of e-business, which has more than doubled in the COVID cricis, is critical to new growth.
Against the background of the COVID risks, global trends must not be overlooked, as they have a much greater impact on the economic environment. For example, the environmental damage caused by overconsumption (global warming, biodiversity loss and pollution) poses a much higher risk to humankind than crowns.
Changes in over-consumption require radical changes in lifestyle and curbing overconsumption growth, as more efficient use of resources (technological development) is not enough. In addition, there is a need for reduce eco-taxes, green investment and large-scale public-private partnerships. Here, every company has opportunities to offer its customers environmentally friendly products and services and to increase sustainable consumption in its customers. As the state supports environmentally friendly innovations, companies’ investments here are also favorable.
It is worth to notice the revolution in genetic and molecular technologies, which affect primarily medicine, but also other industries based on natural raw materials (agriculture, food, welfare and beauty industries, etc.). As Estonia has the world’s top competence in molecular biology and genetics (together with molecular biology it has the most references to scientific publications, exceeding the average 2.8 times), it is worth seriously considering using the opportunities of the biotechnology revolution in developing its products.
Thinking about the future is essentially remembering and making sense of your past and transferring the experienced to the future. This has an advantage for those whith more experience (due to customer focus) and who are more creative in imagining the future, but at the same time more logical in analyzing and using opportunities (due to understanding the flywheel). Realizing and reflecting on new possibilities requires immersion and time, which should perhaps be more available now.
The long-term growth of the company’s value is based on profitable innovations (return on research and development investments). This means that it is not enough to simply increase R&D investments in innovation, but as a result of these investments, both the company’s turnover and profit must increase, respectively.
First, it is important to know the fact that the profitability of innovation depends to a large extent on the leadership of the company. A long-term survey of Standard & Poor’s 500 companies revealed that significantly more profitable innovations are made by companies whose managers know the field very well (have been promoted within the company). As the manager of a company determines the choices of innovation and that he or she cannot make them competently without a very good knowledge of the field, every company should limit its growth and innovation choices to the field that the manager knows well. Otherwise, there is a risk that the wrong decisions of the company’s manager will inhibit the company’s profitability and long-term value growth.
Another very important prerequisite for profitable innovation is research-based. Amazon’s innovations are based on customer–centric science with impressive depth and reach. Because scientific innovation is always ahead of the market, it has allowed Amazon to grow much faster and more profitably than the market.
If Estonian companies want to offer their customers the best products and services in the world as they emerge from the crisis, innovation should be based on science-based innovation. This requires a great deal of self-transcendence and learning, as Estonian research is mediocre (ranked 23rd, 24th, 25th, 24th and 24th in the Global Innovation Index in 2015, 2016, 2017, 2018 and 2019, respectively) and development is one of the weakest (30th, 44th, 42nd, 41st and 44th). But the situation is not hopeless, as we have world-class research potential (clinical medicine, molecular biology and genetics, physics, plant and animal sciences) and it is also possible to choose the best research partners from the rest of the world.
In addition to product innovation, service innovation is just as important, especially when it is difficult to differentiate with a product in the long run because it is standard or very fast to copy (construction, trade, banking, etc.). Service innovations make the customer’s complex business processes much easier and reduce the customer’s time and money.
Here, the possibilities for science-based innovation are the research and invention of analytics and artificial intelligence technologies. STACC, founded by researchers from the University of Tartu and TUT, can be a helpful partner in service innovation, but in a field-specific way, it would definitely be worth looking around more globally to select the best specialized research partners who also have excellent field competence.
Thus,the choices for new growth should be based on the facts that increasing a company’s long-term value requires the courage and wisdom to make profitable innovations, the likelihood of which is increased when innovating in a field that the manager knows very well, when innovations are science-based and the partners are the best scientists in the world.
Finally, it is worth remembering Lewis Carroll’s Wonderland Cat’s response to Alice, who asked for road.
Alice: Would you tell me, please, which way I ought to go from here?
The Cheshire Cat: That depends a good deal on where you want to get to.
Alice: I don’t much care where.
The Cheshire Cat: Then it doesn’t much matter which way you go.
Alice: …So long as I get somewhere.
The Cheshire Cat: Oh, you’re sure to do that, if only you walk long enough.
Indeed, to get somewhere, you have to make choices. Amazon encourages and inspires you to make very good choices.