5 key cornerstones of a super networked business
What is the secret of Amazon’s Success?
AMAZON, AMAZON! ONE OF THE MOST EXCELLENT COMPANIES AMONGST ALL CRITERIA FOR NETWORKED BUSINESSES
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Excellence in any two or three of them will make any business an industry leader. Very few companies do all five of them at the world’s best level. While several companies could be used as case examples to illustrate the concept of 5-STAR Business Networks, Amazon.com is a company that excels in all of them. Amazon.com is a successful example of an emerging Global Business Network.
In the retail industry, Amazon has achieved far more efficiency than its competitors – this allows it to offer lower prices and attract new customers achieving extraordinary growth of 100% in 3 years from 2009 to 2011- a period where other businesses were challenged by the economic crisis post-2008.
When Amazon.com was founded in 1994, it was but one of the hundreds or thousands of businesses aspiring to make it big on the Internet. Just like all its peers, initially the markets and analysts were starry-eyed about Amazon’s success, and later, when the dot-com bubble burst and the trend reversed, few people gave it much chance of success. Yet it defied the naysayers and continued to sell at PE ratios exceeding 100 on the stock markets.
What is the secret of Amazon's success?
What allowed Jeff Bezos to build the largest online retailer in the world, where customers can acquire anything that?
Do they desire to over the internet?
Admittedly, the company started with a first-mover the advantage in its segment – books. Amazon.com was one of the first major companies to sell books online. The business was founded in 1994 and by 1995 the website was launched. Starting, the company was exclusively an online bookstore. However, somewhere along the line, it transformed to suddenly have the ability to sell millions of products to its large and valuable consumer base. Today, the company sells everything from electronics, to clothing, furniture, and even food items.
“Who on earth today is the world's most customer- centric corporation?”
If you had to ask this simple question to 100 people Amazon will figure very high in the names mentioned. Amazon.com has achieved low prices, a wide inventory selection, and convenience, truly giving customers what they want. As a result, Amazon.com has evolved into a Fortune 500 business and continues to grow as a world-class electronic commerce platform.
The company grew its annual revenue from US $19 billion in 2008 to US $24.5 billion in 2009 to US $48 billion in 2011, all the while continuing to invest in future businesses and maintaining a healthy cash flow. How does it do this? In an article in Forbes (April 2012). Jeff Bezos offers some tantalizing clues. Bezos’ main message is to base his strategy on things that will not change.
For Amazon, their purpose is simple: offer a wider selection, lower prices, and quick, dependable delivery. Another significant lesson Bezos reveals is obsessing over customers. Amazon starts with the customer and subsequently works its process backward. The company even designates specific roles performed by trained employees known as customer experience bar raisers. This is one topic that Bezos takes exceedingly seriously. But, to some extent, every corner store does these things just as well. Why, then, would a corner store owner be lucky to grow his lowly sales by a couple of percentage points, while Amazon grew its sales to $48 billion from $24 billion in just three years?
Let us take a more in-depth look behind the curtains.
Jeff Bezos, on the record, said that you have to be willing to be misunderstood for long periods.
While several of Amazon’s designs look like a bust at first, if the new idea makes strategic sense to him, Bezos goes for it knowing full well that people will initially misconstrue the design. In general, that’s what innovation is – people are going to misunderstand it because it is new and fresh.
Overall, the business philosophy is rather simple – make online shopping simple and suitable so that the Customers won’t think twice about buying now with one click The complexity lies in how this simple business philosophy is translated into consistent action, resulting in nearly a billion customer visits a year. There is nothing simple in the complex execution of this simple business philosophy.
Therein lies the dilemma of the modern business world – the quest for simplicity at the highest level, underpinned by the highest level of sophistication reminiscent of nano technology under the hood. Almost all successful businesses do this dance of a 5-STAR business network well – but Amazon does it exceptionally well on almost all 5 fronts. There are many other businesses – some even well-known ones – that could be a poster children for the emerging trend of global Business Networks we showcase in this book. However, no one is more successful, more visible, has higher potential, and is more assured of their role in this revolution. That is why- Amazon.com is a prime example of the 5 STAR Business Networks, which showcase Fire-Ready-Aim Innovation, Seed-to-Store Efficiency, Transaction Profitability Optimization, Advanced Product Phasing, and lastly, Results-focused Modular Outsourcing.
• 5 key cornerstones of a super networked business are:
o Fire-Aim-Ready Innovation HAMMER
o $eed-to-$tore Efficiency DRILL
o Transaction Optimization Profitability SCREWDRIVER
o Advanced Product Phasing CHISEL
o Results-oriented Outsourcing and Modularization JIGSAW OR PLIERS
Amazon.Com achieves high marks on all five key cornerstones of the success of Global Business Networks. Amazon.com shines on Innovation through its unique approach
“One of the only ways to get out of a tight box is to invent your way out,” Bezos declares in an interview As a whole, innovation is the main area where Amazon.com shines (Burrows, Peter. “Bezos on Innovation.”
Bloomberg Businessweek. 17 Apr. 2008) . Their preparedness to launch products, services, features, and offerings that might later fail in the marketplace characterizes their approach to innovation. There is no better test of an idea than the customer who faces the moment of truth when they have to click the buy-it-now button.
Only after exposing it to the harsh realities of the marketplace can an idea be improved by knowing what is missing and how to make it better – an aiming process. Kindle is a prime example of this modus operandi. Bezos believes that innovation is being able to spend a large amount of money to construct the capacity that supports new services. Although it’s risky at times, the payoff is greater. It was Bezos who insisted on the Kindle, a device for reading electronic books, which ultimately resulted in a $14 billion profit for the company.
When picking Jeff Bezos as #1 on the Businessmen of the Year List for 2012, Fortune magazine called him ‘The Ultimate Disrupter”. Outlining his achievements the magazine says:
Bezos is the ultimate disrupter: He has upended the book industry and displaced electronics merchants. Now Amazon is pushing into everything from couture retailing and feature- film production to iPad-worthy tablet manufacturing. Amazon even sells ultracheap database software for businesses. (Oracle (ORCL), take note.) He’s willing to take risks and lose money, yet investors have embraced him, pushing Amazon’s stock up 30% so far this year. And even as Amazon expands and experiments, Bezos remains zealous about delivering a good customer experience. For all these reasons and more, Fortune has named Bezos its 2012 Businessperson of the Year Everything that Amazon does is based on a simple customer-centric proposition: “We innovate by starting with the customer and working backward,” Bezos says.
“That becomes the touchstone for how we invent.”
There is no better example of Fire-Aim-Ready innovation then that statement which stands for the traditional Ready-Aim-Fire model of innovation on its head. Not only does Amazon put this into practice itself, but it also
facilitates the same innovation into its eco system of Business Networks.
When picking Jeff Bezos as #1 on the Businessmen
In a story of Honda managers sent to the US to launch the motor bike business in California in 1959 the author described that these people more by accident than by design stumbled on the strategy of selling smaller 50cc motor bikes through non-traditional retail channels. While their initial intention, and the headquarters’ directive was to sell larger 250 cc or higher bikes through traditional channels, they were flexible enough to grasp the opportunities presented to them and humble enough to learn from the market. Perhaps apocryphally, the author goes on to describe that they lived simply, slept on the floor of their one bedroom rental apartment and traveled on small 50 cc motor bikes to and from work – which was the reason these bikes caught on. The rest, as they say, is history. Honda, now, is one of the most respected brand in the United States.
Contrast this approach with the typical culture of most organizations. Very limited time is devoted to understanding the substance of the issues. Most of the fact finding is done from air-conditioned offices and 5 star hotels. There is little flexibility in the strategies and no room for humility in the strategists’ minds. Scant regard is paid to the feedback from the implementers – who are seen more as self-centered whining rather than genuinely escalating the emergent issues. Is there any wonder that most strategies fail to achieve the kind of results Honda achieved?
Vivek Sood: Sydney based managing director of Global Supply Chain Group, a strategy consultancy specializing in supply chains. More information on Vivek is available on www.linkedin.com/in/vivek and more information on Global Supply Chain Group is available www.globalscgroup.com
Vivek is the Managing Director of Global Supply Chain Group, a boutique strategy consulting firm specialising in Supply Chain Strategies, and headquartered in Sydney, Australia . He has over 24 years of experience in strategic transformations and operational excellence within global supply chains. Prior to co-founding Global Supply Chain Group in January 2000, Vivek was a management consultant with top-tier strategy consulting firm Booz Allen & Hamilton.
Vivek provides strategic operations and supply chain advice to boards and senior management of global corporations, private equity groups and other stakeholders in a range of industries including FMCG, food, shipping, logistics, manufacturing, chemicals, mining, agribusiness, construction materials, explosives, airlines and electricity utilities.
Vivek has served dozen of world-wide corporations in nearly 85 small and large projects on all continents with a variety of clients in many different industries. Most of projects have involved diagnostic, conceptualisation and transformation of supply chains – releasing significant amount of value for the business. His project work in supply chain management has added cumulative value in excess of $500M incorporating projects in major supply chain infrastructure investment decisions, profitable growth driven by global supply chain realignment, supply chain systems, negotiations and all other aspects of global supply chains.
Vivek has written a number of path breaking articles and commentaries that are published in several respected journals and magazines. Vivek has spoken at several supply chain conference, forums and workshops in various parts of the world. He has also conducted several strategic workshops on various aspects of supply chain management. He received his MBA with Distinction from the Australian Graduate School of Management in 1996 and prior to these studies spent 11 years in the Merchant Navy, rising from a Cadet to Master Mariner.
Let us focus briefly on the latest service of Amazon called Kindle Serials. For a nominal fee (less than $2) a book is delivered to the e-device of the customer at regular intervals. As I write this book I know that an enormous period transpired between drafting the first chapter and the last. Coupled with several re-writes, revisions, and edits the cycle time for writing a book runs into months, if not years. A lot of changes within that time frame and early customer feedback would make the book a lot more valuable to all. I know as an author how much I would benefit from a service such as Kindle Serials where engaged customers, having spent less than $2 on a book, are intimately involved in the process of co-creation of the book. Kudos to Amazon for making this possible now. figure 7-2 shows how innovation has evolved at Amazon. Consider Figure 14.2 which shows similar detail for the Market Value to Profits Ratio for the same 932 companies in descending order. The order has changed this time and Amazon is not in the middle of the pack in this figure; rather it is one of the top performers. We use this measure as a proxy for Fire- Aim-Ready innovation – a variable that is notoriously very hard to define and measure. However, as a proxy, the market price has built into it the expectations of future earnings coming from investment into useful and profitable innovation.
Again the proxy may not be perfect. For example Amazon is ranked one of the highest on this measure though other companies might be far more innovative. However, when measured over a database of more than 1000 companies, and using rankings, rather than absolute numbers for these variables, it is possible to obtain a discernible spread of data on each of the variables of interest. Top 20% of the companies for each variable were given a score of 5, next 20% were given a score of 4 and so on, with the bottom 20% of the spread given a score of 1.
Similarly, suitable proxies were used for the other three
variables – none of them are perfect, but altogether they do a good job of spreading out our universe of companies.
Amazon.Com also scores equally high on Efficiency All that innovation and customer-centricity could come at a huge premium. But not at Amazon! The second a key underpinning of Amazon’s success is the next star in the 5-STAR Business Networks – $eed-to-$tore Efficiency.
The Fortune magazine article hyperlinked above  Also
One way to serve customers is to give them the lowest possible prices, and in that way Amazon is more like the granddaddy of American retail, Walmart (WMT), then Silicon Valley counterparts. To offer the lowest prices, Amazon is famously frugal.
Famous for its network of warehouses around the country (and now strategically situated in overseas locations as well), Amazon runs an extremely tight ship. Bezos is known to have personally fretted about a customer order which was delayed by half a day. Early on, after its inception, Amazon realized the need for back-end capability.
It has always distinguished itself from its competitors on its fulfillment capability gives it an outstanding $eed-to-$tore efficiency on key monetary and non- monetary parameters. Starting from a 400 square foot garage storage in 1995, the company had graduated to two fulfillment centers of nearly 300,000 sq ft. in two years, which grew to a network of nearly 50 fulfillment centers with more than 25 million square feet in 2010. Hiring the best people in the business, Amazon learned to digitize its supply chain rapidly and continues to manage it even more efficiently than its more famous competitor, Walmart. Let me summarize by saying that the company has managed to effectively enmesh the best of back-office fulfillment capabilities with the best of front-end customer interfaces to create a fast, pleasant and competitively priced offering backed up by a the strong infrastructure of owned and contracted capabilities to fulfill the promise.
In the figure, consider Amazon first, which holds an item on its shelves (in warehouses or stores) for an average of 33 days before a customer purchases and pays for it. At At the same time, Amazon pays its suppliers in 108 days on average – enjoying a whopping cash surplus of 75 days.
Walmart is equally efficient in keeping its inventories churning through the stores. It achieves the same number, viz. 33 days, in terms of average days on the shelf (in warehouses or stores). However, Walmart is also more efficient in paying its suppliers, within 39 days- enjoying a healthy cash surplus of 6 days on average.
Now let us look at the two businesses most affected by Amazon’s startling rise – Barnes & Noble, as well as Borders. On average, both of them pay the suppliers before the customers walk into the store and purchase the products. Because they have not been able to achieve the $eed-to-$tore efficiencies of Walmart or Amazon – these companies suffer from a Cash Deficit of 13 days and 42 days respectively.
How much does the cash surplus or cash deficit matter?
PE Ratios tell the story of market expectations To answer that question, let us look at the Price Earnings multiples of each of these four companies. As is clear from Figure 9.3 above, at the time of writing Amazon is commanding a market price that equals nearly 200 times its annual earnings, while Walmart commands a price nearly 15 times its annual earnings. That reflects the market perception of respective the growth potential of the two companies, which heavily factors their efficiency in utilizing assets to turn cash into more cash.
Transaction Optimization Profitability
Amazon.com is highly data-driven, early, and realized that every product line, every product, every customer, and every transaction must be profitable in its own right. While investing in the future by selling low-cost Kindles, the company is still focused on making sure each transaction is fully analyzed for its costs and benefits to the company, and profitability is optimized for each transaction. How it is possible to do that?
Very early in its life cycle, Amazon acquired and then continued to refine software that enables it to understand the cost for each product. Being a data-driven company, it analyzes its cost-to-serve at the minutest level possible to understand which products, fulfillment promises or customers are not profitable. The Faber novel slide share above gives an example of a best-selling folding chair that took 15 minutes to pack, eroding all its profitability.
In 2000, Bezos negotiated with the supplier to send it pre- packaged for an extra $0.25. This strategy of discouraging sales of Can’t Realize Any Profits (CRAP) products, combined with its ability to vary the pricing based on the customer the profile has now made the company one of the trends setters in Transaction Optimization Profitability (TOP).
The companies that are best placed to exercise this type of customer intelligence gathering and predictive offering are those selling their ware online. Online habits are a lot easier to track and trace. Customers find it less intrusive than someone following them around their daily routine. Data is easier to gather, collate, analyze and manipulate. By far amazon.com is one of the best companies engaged in customized offerings and pricing.
Advanced Product Phasing
Innovation at Amazon.com comes in waves of enhancements Advanced Product Phasing (APP) involves the judicious release of newer versions of products (such as the Kindle) and features on the website (such as a one-click purchase) to balance profitability and innovation drive. We will discuss this ability of Amazon in a lot more detail in a later chapter, but Figure 7.3
on innovation Amazon shows the phasing of Kindle over the past several years.
In November 2007, Amazon.com launched the Kindle 1. Although it took about a year to grow, by late 2008, the number of titles in the Kindle Store expanded to more than 275,000. But the development didn’t stop there; in February 2009, the Kindle 2 was announced and soon after, the Kindle DX was available. By July of the same year, the Kindle 2 matured and its price dropped. It was reduced once again in October. By mid-October, Amazon.com decided to stop selling the Kindle 2. Even though Kindle products enjoy a short product life cycle, improvements are continually being made and the pipeline of new products is always ready for launch in succession. (Kindle Facts and Figures).
When Amazon launched its first generation Kindle in 2007 for $399, the features of the tablet were quite underwhelming. It had a very simple grayscale screen reminiscent of old Apple laptops, a weird-looking keypad, just 250 kb of memory (in 2007), no camera, no touchpad, no touchscreen, very limited connectivity via Amazon Whispernet and a capacity of just 250 books. Why did it still sell out in less than five and a half hours? Why did Amazon launch it when there were far more feature-rich products already in the market- In this chapter, we look at the story after its launch. The second-generation Kindle, aptly named Kindle 2, was slimmer, more powerful, and featured 2 GB of internal memory. The battery, as well as the keyboard, were enhanced, and the price was reduced.
Success comes only when the Innovation cycle continues in perpetual motion Since then, Amazon has launched newer generations of products every few months in quick succession, while expanding the product family at the same time. The current product family (correct at the time of writing this in June 2012) consists of Kindle, Kindle Touch, Kindle Touch 3G, Kindle Keyboard 3G, and Kindle Fire. The feature-rich Kindle Fire retails for just $199, and the network of services and apps available on this new platform keeps growing. These include more than 100,000 movies and TV shows, thousands of popular apps and games, Amazon Silk – a cloud-accelerated browser, free cloud storage, 19 million songs, email, document reader and a Kindle owners’ lending library.
Amazon is not alone in its phased approach to product launch and upgrading techniques. Every major electronics manufacturer, mobile phone manufacturer, and consumer and the industrial company follows a similar strategy. Companies with a 5-STAR Business Network are far more successful and profitable in their product use an Advanced Product Phasing strategy, as we will see by the end of this chapter.
As a company evolves and starts going up the track of innovation, very rarely is the product taken straight through a single lifecycle up to decline. Generally, as it goes up to the maturity stage, the company starts thinking about the next generation of the product. A newer, better product is thought of, one with better technology. An innovation cycle ramps up as shown in Figure 11.1:
The effort is focused on the current product as well as future products And while the previous product is still in the growth stage, the company starts developing the next-generation product simultaneously. The intent is to launch this next-generation product just as the previous-generation the product starts entering its declining phase. Todo so, the company starts developing in parallel; the new generation products; however, it doesn’t need to go back to the introduction stage for this development. The cycle of innovation keeps shortening as newer and newer generation products are launched and the supply chain must keep cycling between adaptive stages and integrated stages to facilitate the innovation cycle. Figure 11.2 shows
such a multi-generational product life cycle. Even if in some cases, such as Amazon’s margin of 1%, where the profit margins are very low placing them lower on $eed-to-$tore efficiency measure than would be warranted from other internal variables, this deficiency will be made up in other measures such as Market Value to Profits ratio (for example Amazon’s case it is 125 compared to the market average of 14.9).
Let us see how that happens
Results-oriented Outsourcing and Modularization
Outsourcing and Modularization form key underpinning of Amazon’s ability to act Last, but not least, is Amazon’s ability to deploy outsourced services in a results-oriented and modularized manner. The first thing to notice is that no single company carries out all the outsourced services for the company. A mix of in-house and outsourced service providers are deployed in a modularized manner to create the outcomes that the company wants. All the service providers – whether IT services or logistics services or other suppliers – work in a results-focused environment due to $eed-to-Store efficiency drive and Transaction Optimization Profitability. Because the data, know-how and smarts resides with Amazon, the service providers work towards Amazon’s strategic objectives rather than their own.
In 2001, the second-largest U.S. bookseller, Borders, decided to call it quits online and chose Amazon for outsourcing its operations. Next, Amazon took over the Web operations of Borders Online Inc. and re-opened it is a co-branded site. The site was powered by Amazon and on top of that, it handled Borders’ inventory, customer service, and shipping services for books, music, and video sales. All and all, this was a win-win situation for Amazon; eliminating a competitor, receiving new consumers, and some extra revenue. (Copeland, Lee. “Boarders Turns to Amazon for Outsourcing.” Computerworld. 16 Apr. 2001).
By 2002, the company quietly formed an electronic
commerce outsourcing business with clients like America
Online, Target, and Virgin Megastores. Another significant deal Amazon obtained was with Toys “R” Us in 2000. With that, the business exceeded more than 30 partnerships. Even though Amazon wants to develop additional deals, it also wants to continue being selective. Amazon’s then vice-president of business development, Owen Van Natta, said that “name- brand companies that are committed to the customer experience, those are also the partners that tend to appreciate what Amazon has built.” The alliance’s Amazon formed bestowed on it a large benefit compared to rivals like Yahoo and eBay (Fitzgerald, Michael. “Amazon Finds Profits in Outsourcing.” CIO. 15
In a nutshell, Amazon.com, Inc. is a powerhouse built on a solid foundation of 5-STAR Business Networks that it crafts and nurtures. On the face of it, the company delights its consumers through its retail websites focusing on selection, price, and convenience.
However, what makes Amazon a giant are the details we examined briefly in this case study. Along with its enormous product range, Amazon takes advantage of every potential effort to customize the buyer’s experience. Amazon demonstrates the power of 5-STAR Business Networks to the fullest. Innovation, efficiency, optimization, product phasing, and outsourcing are what Amazon focuses on every day. While Amazon will have its ups and downs, at this moment, it is clear that it will be around for a while.
About the Authors
Vivek Sood: Sydney based managing director of Global Supply Chain Group, a strategy consultancy specializing in supply chains. More information on Vivek is available on www.linkedin.com/in/vivek and more information on Global Supply Chain Group is available on www.globalscgroup.com
SUPPLY CHAIN CASE STUDY
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THE 5-STAR BUSINESS NETWORK
If you are deeply passionate about the world of business and supply chain networks as I am, and enjoy digging answers to critical questions that will help build and steer your business with wisdom, then join me. This book is a journey of exploration through the world of business networks that run along the veins of today’s commercial world.
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