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 / Summer 2011 / Issue 63(originally published by Booz & Company)


Focus and Scale on the Internet

Amazon may appear to be a lucky exception, but in reality it built its scale via a combination of an initially narrow focus and a major investment in unique capabilities. Although Jeff Bezos chose the name Amazon as a nod to the world’s most voluminous river, with a vision of being Earth’s biggest store, he started by focusing on the inefficient supply chain of bookselling. From this base, Bezos invested in technology and operational capabilities that would provide a source of competitive advantage. Amazon’s website defined the standards for online shopping convenience, with innovations such as its patented one-click shopping feature. Unlike other startups, Amazon did not seek to outsource fulfillment, but instead sought to become the industry leader by continuously investing in and improving this critical capability. Not until 1999 — five years after the company was launched — did Bezos make the claim (publicly and audaciously, in a Time magazine article) that Amazon fulfillment centers were being designed to handle “Anything, with a capital A.”

Lessons in Focus

Amazon has gained scale through its success rather than seeking scale as the key to success. In doing so, it followed a path similar to that of Walmart, the dominant mass-market player of traditional retailing. As the world’s largest company, Walmart certainly benefits from scale economies, but it did not become the world leader because of a scale advantage. When Sam Walton opened his first Walmart in 1962, he had already spent 17 years learning about retail. His new chain built discount stores in smaller, underserved cities and towns in the southern United States. It took 30 years of steady growth for Walmart to pass the then-dominant discounters, Kmart in 1990 and Sears in 1992. Walmart’s revenues now total $419 billion, nearly 10 times the combined sales of those formerly dominant rivals, which now operate as the Sears Holdings Corporation after a survival merger in 2005.

Many of the recent success stories of the Internet demonstrate the value of focus over scale. Two of the best examples are Inc. and Quidsi Inc., both high-profile acquisitions by Amazon over the last two years. In 2009, Amazon closed a $1.2 billion acquisition of Zappos, its biggest deal ever. Zappos, founded in 1999, focuses on shoes, a tough category to sell on the Internet because customers want to try shoes on to ensure proper fit, and they often return them. So Zappos focused not only on shoes, but more importantly on building a set of capabilities to attract and retain loyal customers. (See “At Zappos, Culture Pays,” by Dick Richards, s+b, Autumn 2010.) Under the leadership of CEO Tony Hsieh, the company moved its headquarters to Las Vegas in 2004 because of difficulty finding good customer service staff in San Francisco. Las Vegas already had a large call-center industry and a 24-hour-a-day culture fitting for an online business. But Zappos also rewrote the rules of the typical call center to build a capability far different from the traditional mass market–focused model of other online retailers. Amazon tries to encourage customers to interact through the Web rather than the phone, whereas Zappos encourages members of its “customer loyalty team” to connect emotionally with the customer whenever possible. Team members are not measured on call productivity — that is, how quickly they can process a customer and get off the phone. Instead, company lore celebrates the record for the longest call with a single customer, now standing at around eight hours.

Zappos cares about cost — one of its 10 core values is “Do more with less.” But according to VP of Merchandising Steve Hill, “We price competitively, but we do not compete on cost. That’s not the way to attract loyal customers.” Zappos has nurtured those loyal customers to drive the growth of a $4.3 billion online shoe market — and come to dominate it. Amazon was losing the game in the category despite its industry leadership and the extensive shoe offering on its main store and through a separate website, Endless .com, which it launched in 2007. The Zappos focus on customer loyalty was trumping Amazon’s cost-based, mass-market model.

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