What is Amazon's Product Differentiator?

There are (well, used to be) two types of organization attributes: Cost leaders and benefit leaders. To be successful, economist Michael Porter argues that a business must choose one; to try to do both means poor performance. However, recent thoughts are leaning away from that thought. Studying the relationship between product differentiation, market share, and low costs is doable, and some firms have learned to manage the best of both worlds.

We have already established that Amazon is most definitely a cost leader (see previous blog post). But, let's move the conversation further -- Has Amazon simultaneously led a low-cost strategy and a product differentiation strategy? In one way, you can see that one leads to the other: Product differentiation can lead to high market share and low costs.

Let's look at what products Amazon is known for: The Kinde and Other (let's use this bucket to include the sellers' products, which make up a majority of Amazon's sales).

One, the Kindle. Amazon introduced the Kindle to compete with Apple's iPad, and even Apple's e-book prices. Amazon is already at a disadvantage here, adding a new product to an already-existing market. While the iPad was generally for web-browsing, the Kindle would be more beneficial for book-readers. However, the market needed more web-browsing than book-reading, making the iPad remain a higher-seller. Additionally, true to the low-cost leader it is, Amazon sold the Kindle Fire for $199 even though it costs $202 to make, the Kindle for $79... And sold e-books at $9.99, making another monetary loss. (This seems silly, but when you're big, you can do things like push out the paper-book market.)

Two, others' products. Amazon has evolved on e-commerce and selling others' goods at a low cost. In fact, Amazon sells products that span over 25 categories There is nothing differentiated about these products. For fun, check out a detailed infographic here.

The answer is no; Amazon is simply a cost leader and does not have a sustained advantage via a differentiated product. Amazon tried this via the Kindle, but they never found a delicate balance between the two strategies. Which is fine - there is an art to the implementation, and I have no doubt that Amazon could master it.. If they wanted and needed to. With such a strong cost leadership, do they really need to enter into the differentiated product market? Even with lower margins, stockholders still appreciate the market share Amazon has, thanks to its low-cost strategy.

Sources:

• Gaining and Sustaining Competitive Advantage by Jay B. Barney [textbook]
• The Two Business Strategies: Cost Leadership and Benefit Leadership (And Where Michael Porter Missed The Mark) by Jake Nielson [http://www.theinnovativemanager.com/the-two-business-strategies-cost-leadership-and-benefit-leadership-and-where-michael-porter-missed-the-mark/]
• Exactly How Many Products Does Amazon Sell? by 360pi [http://360pi.com/many-products-amazon-really-sell/]
• Benefit Advantage and Product Differentiation (iPad vs. Kindle) by Mattman [http://mbanotebook.blogspot.com/2010/04/benefit-advantage-and-product.html]
• $9.99 Ebook Price To Cost Apple $252 Million by Peter Cohan [http://www.forbes.com/sites/petercohan/2012/04/12/9-99-e-book-price-to-cost-apple-252-million/2/]

Amazon Has Been the Cost Leader and Will Continue to Be

Amazon is perhaps the leader in cost leadership (meaning, lowering economic costs below those of competitors). And this isn't by accident - CEO Jeff Bezos has made cost leadership Amazon's strategy since day one. "There are two kinds of companies: Those that work to try to charge more and those that work to charge less. We will be the second."

Recently, Amazon rolled out a competitive strategy for consumer packaged goods, hoping to bring products to consumer's home more cost-effectively than anyone else can. Because of their strategic position, Amazon has the luxury of negotiating directly with their suppliers for space inside the suppliers' warehouses. What does this have to do with cost? Actually, this is beneficial for Amazon in many ways:

• Wider SKU assortment with immediate availability
• Lower inventory costs overall
• Reduce warehousing and inventory for bulky items
• Just in time supply
• Reducing the overhead of building new warehousing space
• Prime locations to service consumers directly
• Price competitive advantage & shipping vs. traditional retailers

Thanks to economies of scale and the sheer volume of production that Amazon sees daily, they can keep this cost leadership up. First, their they can use specialized manufacturing tools, like this new strategy for consumer packaged goods. Second, because their production is higher, they can build larger manufacturing operations (or, more specifically, create space in suppliers' warehouses). This lower per-unit-cost leads to lower average costs of production. Third, Amazon's costs lower because employees can specialize in a narrow task, rather than having to play multiple roles in the manufacturing process. Lastly, overhead costs are spread between more units.

Amazon doesn't suffer from diseconomies of sale, or the kinds of physical limitations that smaller corporations face in manufacturing processes.

To keep up with Amazon, traditional brick-and-mortar stores like Wal-Mart and Target must provide as much of a differentiated customer experience as Amazon provides in customer service and cutting costs. Amazon has such a learning curve when is comes to manufacturing processes that they are almost guaranteeed to have the lowests costs in the industry. Instead, other businesses need to focus on being a benefit leader, because there isn't any getting close to Amazon's success. This is their playing field; their advantages are rare, they are ever-evolving, and they cannot be copied.

Sources:

• Gaining and Sustaining Competitive Advantage by Jay B. Barney [textbook]
• The Two Business Strategies: Cost Leadership and Benefit Leadership (And Where Michael Porter Missed The Mark) by Jake Nielson [http://www.theinnovativemanager.com/the-two-business-strategies-cost-leadership-and-benefit-leadership-and-where-michael-porter-missed-the-mark/]
• Why Amazon's "Under Tent" Strategy Poses Serious Threats to Retailers by IMS [http://www.imsresultscount.com/resultscount/2013/10/amazon-forges-another-competitive-advantage-over-retailers.html]

Is Jeff Bezos Amazon's Greatest Strength?

As the founder and CEO of Amazon, Jeff Bezos has played a large role in the growth of not only one of the largest companies in the nation, but in e-commerce itself. But is this success by chance, or a direct result of a 20-year stint of great leadership?

The person who plays the role of CEO, or any other general manager, is an important possible strength for an organization. Bezos is known to be a happy-go-lucky risk-taker with an attention to detail and a tendency to micromanage. He also isn't afraid to experiment, even when margins are low; his portfolio of investments ranges from airspace travel to Airbnb. It seems to work for him; Bezos has been recognized as one of America's best leaders, even to the level of the second-best CEO in the world (behind Steve Jobs). And with Jobs's recent passing, Bezos could be well on the way to being the role model for all other general managers in the nation. Bezos was also named as a Fortune Businessperson of the Year. These awards don't come lightly; no matter how much Bezos experiments, keeping the Amazon experience excellent for the customer remains at the forefront. There's a certain respect for a leader who lives out the company's mission in every decision.

The person who plays the role of CEO can also be a weakness. This makes it difficult to prescribe exactly what makes strong leader; what works for some may not work for others. For example, being hands-off can be touted by some as the key to success, while others can tout being hands-on the reason for greatness. In Bezos's case, the exact qualities that make him a strength to Amazon make him a weakness, in some eyes. He was named World's Worst Boss for alleged workplace conditions (long hurs on feet, harassment, high turnover).

Ultimately, Amazon wouldn't be here without Bezos, and Amazon wouldn't still be here and running strong without Bezos. Whatever the nay-sayers state as fact can't ignore that record. "His moves are driven by clear thinking and a cohesive vision, even if it takes a while for rivals to figure out Amazon’s motives — at which point it may be too late."

Jeff Bezos is an important source of comeptitive advantage for Amazon. There - I set the record straight.

Sources:

• Gaining and Sustaining Competitive Advantage by Jay B. Barney [textbook]
• Jeff Bezos by Wikipedia [https://en.wikipedia.org/wiki/Jeff_Bezos]hgiju]
• Jeffrey P. Bezos by Julia Ramey [https://web.archive.org/web/20090204204126/http://www.portfolio.com/resources/executive-profiles/Jeffrey-P-Bezos-1984]
• Amazon's Jeff Bezos: The Ultimate Disrupter by Adam Lashinsky [http://fortune.com/2012/11/16/amazons-jeff-bezos-the-ultimate-disrupter/]

Remember When Amazon Led the Emerging Online Bookstore Industry?

Amazon created an industry around technological innovation: the idea of the online bookstore. Customers' needs were developing, and emerging towards a new .The result was superior performance for a time... In fact, from 1995 until who knows.

That was Amazon's advatage: They were first movers in the development of this industry; they created the strategic and technological decisions early enough to where firms either imitated them (Barnes & Noble) or joined them (Borders).

1. Technological leadership

Amazon framed customers' expectations about what an online book retailer loos like, the user experience, the organizing of genres, the pricing, customer ratings and reviews, and more. Building on their success of the online bookstore, Amazon expanded their inventory to include music, electronics, apparel, toys, and housewares, all the while continuously improving their users' experience while keeping it familiar enough to not lose their customers.

2. Preemtion of strategically valuable assets

In emerging industries, many of the rules and standard operating procedures for competing and suceeding are yet to be established, so they can sometimes create the rules that end up benefiting them. Amazon formed relationships with publishers and authors far before others were able to reach out to them. This bargaining power even leads to Amazon being able to control price. Additionally, strategically-placed distribution centers and fulfillment methods are incomparable to what other companies could replicate. 

3. Creation of customer-switching costs

Amazon created cutomer expectations around online boostore and, ultimately, e-commerce, and customers are happy with what Amazon has shaped to be. Customers have an account, they do one-click shopping, and they have no need to go elsewhere. Why do that, when you have everything you need at your fingertips? The risk of being disappointed is too great.

Most first-movers see the advantage of maintaining 7% of the market; Amazon sees much more than that, being one of the most recognized e-commerce retailers on the Internet. Will there every be a second-mover that eclipses Amazon's success? It's doubtful, as no other online company has been nearly as successful. Aso, the second-mover pays approximately 65% more than the first-mover just to be on top. If Amazon is eclipsed, it will be by a very big, technologically-savvy, and luctarive business.

Sources:

• Gaining and Sustaining Competitive Advantage by Jay B. Barney [textbook]
• First-Mover Advantage by Deborah R. Ettington [http://www.referenceforbusiness.com/management/Ex-Gov/First-Mover-Advantage.html]
• First Mover or Fast Follower? by Scott Anthony [https://hbr.org/2012/06/first-mover-or-fast-follower]
• First-Mover Advantages by Stay Young [https://calvinblogger.wordpress.com/2013/03/19/first-mover-advantages/]