The Amazon Management System . Ram Charan
first party selling business is a store, and would not qualify as a platform. A platform engages multiple parties, facilitates complicated transactions and/or interactions with multiple products and services, and creates value for all parties involved.
To have Amazon truly become a platform, Bezos coined the concept of the “unstore,” in order to reframe the notion of Amazon to those who saw it as merely a retailer that had set up shop in a digital zip code. He repeatedly explained and elaborated on why Amazon is a technology company, not a retailer. He argued that Amazon should only concern itself with what is best for the customers, helping them to make the best choices.
This decision would have enormous operational and strategic implications. Amazon would not be bound by traditional retail rules, and, more importantly, would center its efforts on how to build long-term trust-based relationships with customers, instead of how to maximize short-term revenue and profits through its first-party sales.
That’s why after two failed attempts to attract third-party sellers (both launched in 1999, Amazon Auctions abandoned in 2000, and ZShops abandoned in 2007), Amazon audaciously launched the Marketplace, an e-commerce platform owned and operated by Amazon that enables third-party sellers to sell new or used products alongside Amazon’s regular offerings.
In the beginning, many people were baffled by Amazon’s decision to list search results of items from first-party and third-party sellers on the same page, to empower third-party sellers with all kinds of powerful analytical and management tools, and even to share with them Amazon’s own customer base and core competencies, such as fulfillment.
To anyone who would view Amazon’s business model as an online store, its generous offerings to third-party sellers seemed totally insane. Why help your competitors? And yet, to anyone who sees Amazon as a platform, the choice totally makes sense. Because in the platform model, third-party sellers are not competitors, but valuable ecosystem partners. Amazon has built an ecosystem of millions of small and medium-sized businesses, third-party sellers, developers, delivery service providers and authors. 5
By oneself alone, one can never build a platform; by working together with ecosystem partners, a platform will emerge, develop and gradually flourish with a booming ecosystem attached. That’s one of the critical new laws of the game in the digital age. Amazon had the prescience to recognize the dynamic business models increasingly possible under the laws of the digital economy; and created unimaginable value by having these insights early enough to act on them boldly and accelerate the benefits of their interrelated aspects.
Amazon’s famous flywheel (shown below) visually and vividly illustrates the inner logic of how a platform works.
As a standalone online store, one can offer only so many items and serve so many customers, and essentially grow in a linear manner. The platform business model opens everything up for third-party sellers, who trigger growth of a higher order—a jump from linear to exponential, Newtonian to quantum.
More sellers will bring in more selection, attract more customers (i.e., traffic), and thus increase scale (i.e., growth). Increased scale will further reduce cost structure, and will translate into even lower prices for the customers. With increase in selection, decrease in price and likely improvement of convenience (another side benefit of increased scale), the customer experience will be enhanced. The enhanced customer experience will generate more traffic, thus further driving the growth of a powerful flywheel.
This is exactly the innate beauty of platform. All Amazon’s generous offerings to and strong empowerment of third-party sellers, its partners within the ecosystem, are the self-reinforcing mechanism for the long-term growth and prosperity of Amazon’s platform.
By 2018, Amazon had become the biggest online sales platform with 45% share in the US (as shown below). Third-party selling achieved a staggering 52% compound annual sales growth rate, and grew from $0.1Bn in 1999 to $160Bn in 2018.6 Bezos joked in the 2018 Letter to Shareholders, “The percentages represent the share of physical gross merchandise sales sold on Amazon by independent third-party sellers – mostly small- and medium-sized businesses – as opposed to Amazon retail’s own first party sales. Third-party sales have grown from 3% of the total to 58%. To put it bluntly: Third-party sellers are kicking our first party butt. Badly.”
4.0: Infrastructure and online and offline platform
With the $13.7 billion acquisition of Whole Foods in 2017 and the opening of Amazon Go, Amazon expanded its empire into fresh grocery and offline. Actually Amazon had been experimenting with the fresh grocery business for several years before the acquisition.
Why was this particular category so important to Amazon? Because shopping for fresh grocery is a high-frequency activity. For some, it may be once a week; for some, it may be two to three times a week; for others, it could be a daily routine. This schedule of frequent interactions with consumers is a dream come true for Amazon, a platform that has almost everything for almost everyone. In addition, Amazon was uniquely positioned to leverage its vast existing customer base, coupled with its unique fulfillment capabilities, to expand into this adjacent space both online and offline.
The most prominent and also most surprising aspect of Amazon’s business model is probably its success in infrastructure business, such as Fulfillment By Amazon (FBA, 2006), Amazon Web Services (AWS, 2006), and Alexa (2014).
Despite strong competitive pressure from Microsoft, Google, and Alibaba, AWS remains number one in the global cloud service market with over 40% market share worldwide. In 2018, AWS had millions of customers, ranging from startups to large enterprises, and from government entities to nonprofits,7 and achieved $26.7 billion revenue, 11% of Amazon’s total, and $7.3 billion operating income, 59% of Amazon’s total.8
How could Amazon make such a successful expansion into infrastructure business?
Over the years, to keep its first party selling business up and running, Amazon has accumulated tremendous expertise in fulfilment and technology. By the traditional theory of competition, companies should safeguard these core competencies as proprietary know-how, strictly using them for internal purposes only. Amazon recognized the new laws of the game in the digital age, and saw how these competitive strengths could open the door to a new option: making it a service to serve external partners.
For example, through FBA, items sold by third-party sellers would be covered under the Prime program, meaning they would quality for two-day free shipping, thus giving a significant boost to their business.
The same line of thought also applies to AWS. These flexible, affordable, convenient, and empowering services are essential for start-ups and SMEs (small to medium enterprises). With cloud services, these companies do not have to make a heavy upfront investment in building their own IT system. Instead they can rely on AWS and simply pay for usage. In this way, Amazon lowered the resources and expertise required to start and grow a business.
Alexa is even more so. It’s a cloud- and voice-based AI assistant. In addition to Echo, it is also open to both other companies that create smart devices, and external developers. As Bezos proudly announced:
“Since that first-generation Echo, customers have purchased more than 100 million Alexa-enabled devices . . . . The number of devices with Alexa built-in more than doubled in 2018. There are now more than 150 different products available with Alexa built-in, from headphones and PCs to cars and smart home devices. Much more to come!”9
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