Amazon faces a huge and dangerous dilemma


After the resignation of its charismatic leader Jeff Bezos, Amazon faces a crossroads: it must either refocus or else retreat to mediocrity.

Exceptionally successful companies are very customer-centered and innovative when starting and therefore grow much faster and more profitably than the market. But they soon tend to enter a new market with new customers and different business processes. As competition intensifies, they have the choice of regaining their original focus for exceptional growth or becoming a medium-sized company with an overly broad profile. This is exactly the dilemma that Amazon is currently facing.

Jeff Bezos’s explanation to employees when he resigned as head of the company was not convincing. He mainly talked about Amazon’s extraordinary innovation and did not explain what led him to leave Amazon. The fact that space exploration is suddenly much more interesting is not plausible, because he has had this interest for a long time, and he has not explained why it has suddenly increased so much that he has to leave.

The real reason for Bezos’s resignation is most likely that Amazon has fallen into a trap caused by its own success. Thanks to its exceptional customer center and exceptionally successful innovations, the company has grown steadily faster and more profitably than the market and has become a powerful market leader in both the online store and cloud computing (AWS) businesses, creating exceptional value for investors.

You can be successful in two areas at the same time, as long as there are no other strong players in the market in these areas. And this has been the case with Amazon. Bezos says that after Amazon opened an online store in 1995, Barnes & Noble did not open one until 1997, and after the Kindle e-reader hit the market in 2007, Barnes & Noble’s e-reader, Nook, did not appear until 2009. And Amazon made a success of cloud computing for as long as seven years.

Although the cloud computing service grew as a natural part of the needs of third parties in the online store, it is still a completely different business compared to the online store. While the main customers of an online store are consumers, the customers of data processing are companies. While consumers need the best choice of products at a standard best price, companies need personalized solutions for affordable data services, especially large companies that provide more volume. While the former requires the highest possible degree of automation, the latter requires a significant degree of tailored service.

As Amazon’s success has been driven by a high degree of automation of operations, now is the time to choose a direction. Shift the focus back to growing as an online store, or instead shift the focus to cloud computing?

The question is whether to compete with Walmart or Microsoft. It is not possible to achieve both in the long run, as this would require the integration of very different business processes, in a situation where volumes are constantly growing. Not even the brilliant Bezos would be able to integrate and manage it all, let alone Andy Jassy, ​​whose leadership qualities are much more modest.

Constantinos Markides, a professor at the London Business School, has researched and shown how different types of business can be linked. Unfortunately his examples are only mediocre companies (e.g., Nestlé, Edward Jones, Reuters, Tesco), because the obstacle is the competition between different businesses in the company—between the attention of managers and the distribution of resources, innovations and investments.

As the focus on narrow-scale activities yields much better results, it has been confirmed in studies of well-compared companies, such as in the biopharmaceutical field, where the focus (specialization in research) significantly increases output and productivity. It has also been found in cardiac surgery, where specialization provides much better treatment results. The focus is on the fact that specialization enables employees throughout the company to learn in depth and continuously increase their success growth, as well as to avoid conflicts between fields.

Amazon’s current choice is not easy, as cloud computing accounts for 60% of Amazon’s profits. At the same time, as an online store, Amazon has a much greater competitive advantage in the long run, as its economies of scale are several times greater than those in cloud computing, where Microsoft, Google and other innovative competitors are approaching. But with Andy Jassy, ​​the head of cloud services, appointed Amazon’s new head, Amazon can expect to see a better future in this area.

As Bezos moves away from day-to-day management, it is unlikely that the non-tech man and less charismatic Jassy will be able to beat Microsoft in the long run in the cloud computing industry, led by Satya Nadella, a talented leader in the field who has given Microsoft a new lease of life.

Amazon’s growth to date would have been even stronger if it had kept its focus and devoted all its resources and innovation to the online store and had not strayed into setting up physical bookstores (2015), grocery stores (2017), and liquor stores (2019), and if it had spun off the cloud computing business after its successful launch (2002–2006).

It would also be wise for Amazon to withdraw from the integrated online store service launched in 2015 for business customers who need personality and flexibility, which is not Amazon’s strength or competitive advantage.

According to Brad Stone (the author of Amazon Unbound), for 25 years Bezos has shown an extraordinary talent for always choosing the right door at the right time. The future will show what choice Bezos will make if the company’s growth starts to slow down. If it narrows its focus, Amazon’s extraordinary growth could continue. For example, the robotic surgery corporation Intuitive Surgical has firmly maintained its focus, and it grew almost twice as fast as Amazon did over the comparable period (June 13, 2000 – December 31, 2020). So, the right choices pay off.

Otherwise, it will take only five to 10 years for Walmart to catch up with Amazon as an online store. And then Amazon will have become yet another mediocre company that fell into the trap of its success and lost focus, like Hewlett-Packard, IBM, or General Electric.

The article was published in Äripäev Online, February, 2021.

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