The Economies of Variety

    This is cross-post from my new blog "unRelated"

There were a couple of articles about Amazon in the Wall Street Journal this week that caught my attention. And then, there was Venkat Rao's latest post on the Economies of Scale, Economies of Scope. Incidentally, his blog, RibbonFarm, is rapidly becoming my favorite blog.

It looks like the book industry has decided to go thermonuclear while the box stores have declared war on Amazon. This could end up being one of the most challenging holiday season for Jeff Bezos. Let's try to understand why and then let's connect Venkat's question to Amazon's recent strategic path. (Venkat also wrote last year a great piece on Amazon's strategy).

First you might ask, how could Amazon really win the Platform game against Google and Apple? Yes, I get it, Jeff pioneered the Platform, yes they can build stuff, really innovative stuff, and I wish they could win, Hollywood Style, but what are the odds? How much resources is Jeff Bezos wasting by building more tablets, and possibly a phone? why not a chrome "book" too?

So, there is a very legitimate question pointing on Amazon's horizon: where is it today? at Waterloo or Austerlitz? Amazon is facing  the mother of all coalitions that spans from Apple to B&N, and there is no fog here to hide its intentions. You might argue that the retailer flanc is weak and they are playing their last card, somewhat desperate if you ask me. When was boycotting or price matching a business strategy?

It seems though, that neither Amazon nor the retailers have a clue as to the world has become and how the architecture of retail is changing. Whether he likes it or not, Amazon is a commerce company, an amazing one: they sell, sell, sell. They are also a catalog, a big catalog, the best catalog, and a logistics engine, a big one too.

And yet, it has to be Apple, the Platform leader, who tells us that retail is not dead. There is light beyond boycotts and price wars. Retail is a major competitive weapon in the Platform era, so big, that Microsoft had to follow. The Apple Store in Bellevue that just opened is at least 10 times bigger as it was. Anyone can guess why?

If Jeff Bezos had a map of that retail battleground it probably would look like this (this diagram doesn't even start to do any kind of justice to the amount of technology Amazon innovated):

The story is the same across the entire landscape: shoppers need to see the product before they buy it, be it a book, a dishwasher or a toy, even an iPhone or a Surface.

Amazon does own a couple of key activities in the overall process: it informs the customer with the best and largest catalog on the planet, it sells at the best price point, but it can't show anything other than pictures and it can't deliver products as fast as they can be picked up from a physical location (or serviced for that matter). Shoppers quickly "optimized" the process, a modern veni, vidi, vici: find, see, purchase.

Everyone knows that, and clearly price matching and boycotting are indeed a reasonable response to Amazon's business model. So will Amazon lose on all fronts during the 2012 holiday season and will it be some kind of a Mayan event, a Waterloo of some sort? With a 1999 style P/E hovering at 300, Wall Street certainly doesn't think so.

I would certainly edge my bets. Everyone knows all too well that content is key, if Amazon's catalog doesn't have what shoppers want to buy, they'll come less often and if the same shoppers can get their hands on their toys at the right price point before they can even be shipped, yes, you guessed it, Amazon will soon be the leader of diaper and dog food replenishment. After all, maybe that's why Amazon is adopting a "fuite en avant" strategy by competing head to head with Apple and Google. Unless they think they already have won the retail battle. I actually agree, if Amazon successfully delivers a Platform, it could become its Pratzen Heights and from it, it could defeat the retailers once and for all and dominate commerce, if it fails it could lose it all and, Wall Street will send Jeff Bezos to Saint-Helena Island.

With such a majestic theater, on the eve of one of the best economic battles, you would think that all the protagonists would have given us some hint on how they will leapfrog their enemy with an overwhelming force of innovation. Unless I missed something, the strategies deployed by both Amazon and its competitors are surreal and anachronic. Nobody, other than Apple itself, seems to be able see the three major forces at play that are transforming retail:

  • the rapid emergence of rCommerce (Relationship Commerce) between people and between people and products
  • the decoupling of processes (retails couples catalog management, aka shelves, stock and order/payment)
  • the integration of commerce activities with the context of the "Jobs customers are trying to accomplish"

In effect, Amazon needs to:

  • Launch an army of rCommerce (including affiliated) apps that will allow its customers to order whatever they need in the most convenient way, just-in-time and just-in-place. The Catalog as we know it is dead. That will weaken its competitors to a point of no return.
  • Invest in showrooms children museums for the products that must be seen before they are bought (including books), a space where customers experience the products, not just see it. The shelves are gone. That will kill Amazon's competitors.
  • Build a continuous logistics engine with multiple SLAs, from Pizza delivery (and pickup) to two men an a truck to support that new commerce vision.

Interestingly Amazon seems to be investing in neither. It wants to compete with Apple, yet it seems to have no clue as to how central retail is to Apple's business model. I don't want to sound dramatic, but we all know how that will end.

So, if we go back to Venkat's post, yes, I see a 3rd function emerging in the enterprise, beyond innovation and marketing. That 3rd function is (continuous) Strategy. For way too long Strategy has been considered a static, discrete process, formulated in a retreat, planned by senior management and executed with a precision that would scare the Supreme Soviet. Yes Amazon had an incredible strategic run over the last ten years, backed by a perfect execution, and delivered the Cloud and the Kindle in the process, but today it seems stuck in Jeff's ego who wants to be on the same pedestal as Google or Apple. There is certainly a bit more glamour to compete against the iPhone compared to a Walmart shelf, but in the midst of the tectonic shift introduced by the Platform, that kind of approach to business strategy will kill Amazon in an instant.

In our book, we formulate six principles on which to build the 3rd function:

  • Strategy is not sequential
  • Strategy is not static
  • Strategy is not ?value? or ?cost?
  • Strategy is not ?product?
  • Strategy is not ?big picture?
  • Strategy is not commoditization

To continue responding to Venkat's post, he explains: ?Whatever this third function, it will be heavily dependent on technology: machine learning and data technology in particular. ?, I would actually beg to disagree. He is on the right track when he talks about machine learning or big data, because both of these technologies give you some kind of visibility, but what you need, above all, is human visibility, you need to do like Apple did with Cards and pick, across hundreds of features and processes, across dozens of dimensions, the one solution that will give you a decisive advantage. This is why our book is about improving human visibility, there is no amount of big data or machine learning that could have given Apple a hint about building Cards.

The economies of variety speaks to the very notion of "just-in-time,  just-in-place" or the circumstances as Clay Christensen would say. While the economies of Scale speak to affordability in the market, and the economies of scope speak to addressing the whole set of needs of the market, the economies of variety speak to being there, which is essential in a world where you can be (and must be) just a thumb away from your customers.

Continuous strategy also transcends Value Innovation, as defined by Kim and Mauborgne:

Value innovation is created in the region where a company?s actions favorably affect both its cost structure and its value proposition to buyers.  

You can no longer just talk about cost and value, and you can no longer rely on Marketing to own the visibility of your products. In the platform era, it has become critical to see and be seen. Only a global and continuous strategic function would allow you compete effectively across the three dimensions: scale (cost), scope (value) and variety(visibility).


Amazon's Future

This is cross-post from my new blog "unRelated"

Amazon is a great case study for our methodology. Amazon is a formidable innovator and strategic player. Not only did Amazon single-handedly pioneered the Platform, but it remains a fierce competitor to Apple and especially Google.

Amazon's achievements are epic, Jeff Bezos took the most boring and probably oldest ecosystem on the planet, an ecosystem that had barely changed from 1440 to 1999 and turned it into the most advanced commerce platform in the world, delivered the first successful commercial Cloud, the Kindle and competes head to head with Apple and Google which have far more resources.

How did the book ecosystem looked like before Amazon (from a retailer's perspective)?

How did Amazon changed it? Venkat Rao published a thorough analysis of Amazon's Strategy from 2000 to present. We will publish our complete analysis of Amazon's strategy in the book. Here, we will simply look at how they transformed their ecosystem and how they could transform it further? Here is what we saw:

Based on the moves that Venkat identified (again, just looking at the ones that have a direct impact on the ecosystem):

  1. Being first to market with a meaningful and usable, but predatory, offering for self-publishers (Amazon Advantage) at a time (late 90s) when getting traditional distribution as a small or self-publisher was nearly impossible
  2. Creating a used-book marketplace that made used books go from 4% of the market to something like 30% in just a few years
  3. Undercutting Lulu, the pioneering self-publishing operation catering to authors, with its Createspace offering, which offers authors better margins
  4. Booting up the Amazon Affiliate program (which, from unverified sources, accounts for about 40% of sales)
  5. Making it brain-dead simple to publish on the Kindle
  6. Creating a royalty option structure for Kindle publishers (70% between $2.99 and $9.99, 35% above $9.99) that leaves you with an offer you cannot refuse for the under-$9.99 price range
  7. Once the traditional supply chain had been sufficiently weakened that traditional publishers were no longer very useful, ramping up direct relationships with authors

How will Amazon innovate in a relationship-Commerce (rCommerce) world? Here is how we see their ecosystem evolve.

Amazon could mine many different relationships:

Author-Reader: obviously with a print format, a book is static and cannot evolve until the following edition. In the Platform era, readers can ask for clarifications and authors can add footnotes and references, transforming the book into something a lot more dynamic.

Reader-Reader: Amazon is already sharing with their readers the sentences of a book that a majority of readers highlighted. Social eReaders also enables readers to exchange ideas about the book, in real-time or not. Who knows, why not even offer readers the ability to collaboratively rewrite sections of the book?

Book-Book: Amazon could create a new business model where readers can access the references of the book (for a fee), or maybe the entire referred book, for a short period of time, as you explore the reference.  How many more books do you think Amazon could sell if they let readers explore references?

Book-Products/Location: the book could also be easily be connected with products or even locations. Why wouldn't Amazon set trips based on particular stories for readers who want to follow the steps of their heros? Conversely, if you are in a given place or heading on a trip, why not be able to query your library in such a way that sections of books that talk about that particular location can be made available easily? Similarly, why not be able to purchase products based on the content of the book or search for product references in your library?

Author-Author: again, a book is inherently a static document, with a begin and an end. Why not allow authors to collaborate and let different authors create different paths that inter-relate and let readers chose the path of the story they prefer, or different levels of details. Amazon could then charge based on the path and create a revenue share model.

... and we could go on and on, talking about the relationship between books and games, books and friends, and so on.

rCommerce is here, there is a massive land grab that is about to happen since pretty much every commerce activity is unRelated today.

But that's not it, our analysis shows something else. Amazon could be fighting the wrong battle altogether  They would be extremely lucky if they could remain a platform operator and take a dent at Apple or Google's market in the long term. They lack a key component: the relationship engine (as described in our chapter, "the world in motion"). Apple has the potential to acquire its own, and Google will find ways to grow Google+, but Amazon has no means to acquire or built that capability. If it continues on its path to build a full platform, up to smartphone, it will waste precious resources that could be used to win a much more important battle.

Amazon is inherently an "App" company. The Kindle is an app, not a device. As we have seen above it can even be made a greater app, that could dominate the digital content industry, even ahead of iTunes. But Amazon could extend the reach of its commerce platform much further in the app world in a couple of dimensions:

a) the micro-commerce dimension: catering to the SoniCares of the world (see "the world in motion" chapter). It could look back at it's entire catalog of products and decide which item should be micro-commerce enabled.

b) the just-in-time commerce dimension: the Platform is about to prove further (if it was needed), Clay Christensen's theory that:

what?s really important is understanding the job that customers are trying to accomplish

The platform is putting a magic wand in every customers' pocket. Whatever job they are trying to accomplish, they can order whatever product or service they need, get support from the vendor, or other consumers, ...

Amazon has the opportunity to reinvent commerce, and bring commerce as you need it, just-in-time, with a collection of apps assisting jobs that Amazon customers do with Amazon's product.

Amazon is an app company but it doesn't know it. The Kindle is an app, micro-commerce and just-in-time commerce are a lot of apps that Amazon could bake like cookies. If they don't? Walmart or somebody else will...

This is cross-post from my new blog "unRelated"

In the chapter "A world in motion" that we made available, we explain how the Postal Service could reinvent itself and thrive as the logistics engine of the Platform. It seems that they are already well on their wayto take advantage of that opportunity:

The Metro Post service comes on the heels of a similar test by Wal-Mart, which earlier this week said it planned to offer same-day delivery in 10 cities this holiday season. Meanwhile, London-based Shutl received $2 million in funding from UPS in August for a same-day package delivery service, while eBay also is experimenting with the concept.

How will this seemingly unrelated move can change the world as we know it? Logistics is a key enabler of rCommerce (Relationship Commerce). It supports the relationships we have with our environment. In B = mc2, we explain that Philips could probably double their replacement part revenue for their SoniCare line, while making it far more cost effective, by simply providing a mobile app with a single button "Send me a toothbrush".  Before the Platform, nobody knew I had a SoniCare toothbrush. Philips didn't know, the Postal Service didn't know, even the store where I bought it didn't know.

With rCommerce, we sell to the "relationship" be it the relationship between people, or the relationship between people and the things in their environment.

So, how will Same-Day-Delivery change our world?

a) Replacement parts are cool: for instance, our everyday appliances will evolve to have a lot more replacement parts instead of being designed to be thrown away as soon as something fails

b) Everything that can be ordered from an app will disappear from the shelves leaving a lot of empty space, these shelves will move to the Postal Service warehouses

c) Retail Stores will reconfigure themselves to be either a catalog (show room) or an inventory that the Postal Service cannot handle easily. Retail couples three processes: catalog (the shelves), inventory and order/payment. The Platform will decouple them and Order/Payment will be handled directly with the customer mobile device, because this is the easiest way to establish the relationship between the customers and the products they buy. All the mobile terminals that you see in an Apple store or at Sears for instance, will quickly be replaced by an app running on your own device.

Make no mistake about it, rCommerce will reshape the retail landscape as we know it.

I would not be surprised if one day we see the emergence of "continuous delivery"...

Ganesh Prasad and Eric Newcomer are probably one of the two people I respect the most in the SOA community. I had the privilege to work on WS-CAF with Eric and that standard forged most of what I think is right on SOA. I also had the pleasure to meet Ganesh in Sydney in 2009.

That being said I am appalled that in 2012 we are still debating the question Eric asked to Prasad at QCon NY:

"Where I was working previously at Credit Suisse, we had a long debate about sharing and how to share code; we had done some analysis to find there was a lot of overlapping and duplicate functionality in the applications and we could rationalize those down to perhaps a single function that would be shared, but then we had a big question of how should we share it the best way; should we share it with libraries, should we put an abstract interface on it, how should we do it; what are your thoughts there? "

This is an excellent question, one that has haunted and apparently still haunts our industry. So for the record I would like to explain why it is so hard to reuse code and why and how it could be made much easier.

The main consideration you have to make to answer that question is to realize that every concept (software agent, information entity, physical thing, document...), absolutely everything, no matter what it is, has a lifecycle. Unfortunately for us, computers "compute" and do not really care about the states in which "things" are, hence there is nowhere in computer programming languages the notion of state and lifecycle. This is one of the greatest tragedy of software engineering.

I wrote many posts on that concept, but let me reiterate it here one more time. Here is a lifecycle, the lifecycle of stock order (as in stock market). Every state can be understood by any developer and most of them can code easily all the actions that will correspond to each transition on that diagram. That is the code that Eric is talking about, the one that we want to reuse for different situations, for instance retail vs private brokerage. 


The fundamental problem to reuse is the lifecycle itself, the lifecycle is often, if not always different for every context, making it impossible to reuse. People look at reusing operations, blindly, without understanding there is an inherent lifecycle. They say I have a "createStockOrder" operation (POST StockOrder in REST BS), I have a submitStockOrder, a cancelStockOrder, ... check, check, check, retail and private brokerage should be able to use the same operations. Well, a typical problem between private and retail is that the funds are available at different times. Retail operations demand that funds be ready and alocated when the order is submitted, when private activities often involves reallocating funds which are not yet settled at the time the order is taken. As long as the transaction can be settled properly, private banking operations can operate without the funds.

So in general, two different contexts, in which the "service" will be used will require variations on the lifecycle implemented by the service. It is often trivial to align a lifecycle to support multiple contexts, it is just a mater of adding states and transitions. But no, our industry went the other way, it came up with REST, it said, you can't reuse the actions, let's make them disappear, voila. No lifecycles, no actions, everything is now burried under a big pile of CRUD. You want to reuse something? You are on your own, PUT, POST, DELETE, ... that's all you get. 

So no Ganesh, this is not a problem of "smaller components", "chunks", "coupling" or "cohesion" ...  this is simply a problem of lifecycle and variants of the lifecycle based on the context of utilisation. If the lifecycle is the same, great, you can reuse it, if the context requires a different one, you have to augment the existing lifecycle to match two or more contexts. The common parts of the lifecycle (states and actions) will be "reused", the ones that are specifically used for supporting a particular context cannot be reused.

No, it is not a dependency question, it is not a blueprint, it is not about breaking, reuse, ... it is about lifecycle. I am not quite sure why it is not possible to have an honest and serious discussion about the relationship between SOA, reuse and lifecycles. That has puzzled me for quite some time actually. 

Ah ... I nearly forgot, and "reuse" happens the other way around. It is not the new context that is using the old lifecycle, it is the the old contexts which are reusing the new updated lifecycle. 

How hard can it be to understand that?


Jack Greenfield and I have started the process of publishing a new book B = mc2

A sample chapter ("A world in motion") is now available. It talks about how "the Platform" came about and explores where it could go.

?The Platform? is creating a tectonic shift that could be compared to the invention of concrete, the Darby Furnace, the transport of electricity or container shipping.

Market structures and Industry boundaries are about to shift in unforeseeable ways, and every space of the economy should be considered, today, uncontested. There are simply no amount of historical patterns, cost cutting, dashboards, 4 square frameworks or even sustainable evolutions that can prepare an organization to transition into that new world.

The book itself is about a new Business Strategy Methodology well suited to successfully transition your business to the Platform.

We have started a new blog "unRelated", http://www.b-mc2.com/feed

If you have any feedback, Jack Greenfield and I would be happy to hear it.

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