The Economies of Variety


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 insight, 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 our ability to gain insights, 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 raise the awareness about 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).

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