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Posted: June 2, 2014
Matt Palmquist

Matt Palmquist is a freelance business journalist based in Oakland, Calif.

 


 
 

The Amazon Model: If You Can’t Beat ’Em, Work with ’Em

Bottom LineAmazon’s embrace of coopetition—working closely with other firms while also competing fiercely against them—can teach other companies some lessons about counterintuitive thinking.

In late 2000, just a few years after its evolution from online book purveyor to all-around shopping portal, Amazon introduced the “Amazon Marketplace.” This groundbreaking feature enabled competitors of any size to use Amazon’s online platform and technological capabilities to present their millions of new, used, and rare books to millions of customers, right next to similar products sold by Amazon itself. In effect, the Internet’s leading e-commerce site was not only allowing customers to choose between its offerings and its competitors’, but was also the one inviting those competitors to join the party in the first place.

Bringing third-party sellers into Amazon’s own online store sparked debate both inside and outside the company. But as early as the second quarter of 2002, Amazon reported that third-party transactions represented 20 percent of its North American sales, and by 2010, the marketplace accounted for more than 35 percent of sales. It remains the centerpiece of Amazon’s coopetition-based approach, an unconventional strategy that seems purely counterintuitive.

Amazon’s business model also holds lessons for other companies willing to risk collaborating with their competitors to evolve, grow, and survive, according to a new study.

To conduct an in-depth case study of Amazon’s emphasis on coopetition throughout its history, the authors analyzed the company’s annual reports, financial statements, and news releases between 1997 and 2012, as well as case studies, journal articles, and books about the firm. They also conducted interviews with a key executive who oversaw one of Amazon’s international websites.

Amazon has successfully employed the coopetition strategy in three distinct phases, the authors found, all of which had a significant impact on the company’s performance as well as the global book business. Following the introduction of the Amazon Marketplace, the second coopetitive rollout occurred in the spring of 2001. Though it initially began as an agreement with Borders—one of Amazon’s stiffest bricks-and-mortar rivals—to operate Borders’ online store, the platform gradually expanded to help many different retailers, including Netflix, through Amazon Services.

The third phase occurred in late 2007, with the introduction of the Kindle e-reading device. Not long after the launch of Apple’s iPad, the two rivals teamed up to distribute Amazon’s e-books through the iPad’s Kindle app. It was a convenient trade-off: Amazon got a wider market for its Kindle, and the Apple iPad became a more comprehensive content provider. “Thus, both firms create and capture value together in the domain of iPad content providing, while they simultaneously compete with the Kindle Fire and iPad platforms,” the authors write.

What can other firms learn from the Amazon approach? The first lesson, although it flies in the face of traditional thinking, is to let the competitor win—for a little while, at least.  By inviting rivals into its business model and thus creating a larger overall market, a firm can potentially capture a bigger share for itself down the road. Take the so-called AIM alliance between Apple, IBM, and Motorola. Although Apple and IBM competed fiercely in the personal computer market, their collaboration on a new wave of microprocessors created new markets and opportunities for both firms.

Let the competitor win—for a little while, at least.

Or, as the Amazon manager interviewed for the study put it, “If you want to be a platform, you have to sign up as many of the market players as possible—even if that means branding for competitors (who then become customers). Otherwise you can never become the predominant player.”

The second takeaway: Firms can use their resources more efficiently when they share or leverage them with competitors through a coopetition-based setup. The well-documented relationship between Sony and Samsung enabled the two direct competitors to establish joint technology and manufacturing plants in South Korea that has helped them become market leaders in the LCD TV segment over the past decade. In addition, Sony’s advantages in technological knowledge and Samsung’s marketing abilities dovetailed in a (competitive alliance that has expanded the global LCD TV market and made the two companies dominant in their fields.

Examples abound in other industries as well. Rival automobile manufacturers such as Citroën, Peugeot, and Toyota share technology and resources while simultaneously competing for customers through branding and by producing slightly different car models. Similarly, Swedish breweries work together to return empty beer bottles from wholesalers in order to cut down on transport costs. In the airline industry, the Star Alliance network and Oneworld links between competing carriers help them save on logistics, marketing, and ticketing.

In the third phase of coopetition, involving rivals inside a company’s business model can give firms a leg up against other competitors in the industry. This jibes with the emerging notion that business can be viewed as competition between networks and ecosystems rather than individual firms. The Kindle and iPad alliance, for example, fortified both Amazon’s and Apple’s position against competitors in the book market industry.

Coopetition can take many forms, including the sharing of costs, distribution channels, innovation efforts, marketing campaigns, and risks. Corporate decision makers should reflect on the coopetitive approach and consider the possibilities of replicating certain aspects of Amazon’s strategy, the authors suggest. They should continually examine organizational structures for ways to bring in competitors and scan the marketplace for potential collaborators. As the Amazon case shows, coopetition can have sweeping effects on entire industries, and managers should keep a close eye on the alliances and deals being struck to ensure their company isn’t left behind.

“By collaborating with its competitors, a company can build new capabilities and gain better leverage on its current ones, as well as boosting its brand and technologies,” the authors write. “This mechanism also works vice versa, in that the company can leverage its competitors’ resources through coopetition-based business models and increase the overall value for its own customers.”

Source: Coopetition-based Business Models: The Case of Amazon.com, by Paavo Ritala (Lappeenranta University of Technology), Arash Golnam, and Alain Wegmann (both Ecole Polytechnique Fédérale de Lausanne), Industrial Marketing Management, Feb. 2014, vol. 43, no. 2
 

 
 
 
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