Sunday, 25 December 2016

Why Amazon beat traditional retailers; the significance of New Culture

Amazon’s operating culture offers a lesson for sectors trying to transform in a digitising economy.  This post compares Amazon to the US’ retail industry as an example.

New versus traditional culture

Amazon is really a traditional retailer (in contrast, eBay using a marketplace model isn’t) with a difference – heavy reliance on tech.  Today storied retailers like Sears have followed this model by investing equally in tech.  But while Amazon continues to grow, Sears isn’t.

Jeff Bezos’ inspiration came in 1997 when he realised that the internet will transform industries and started  “Bezos still talks about the Internet as an ­uncharted world, imperfectly understood and yielding new surprises all the time.” (‘Jeff Bezos's Top 10 Leadership Lessons’, Forbes, 4 April 2012).  He lives and breathes the internet in his daily work.  How is this translated to business?

Customer-centricity is the first law

Ask any large business if customer service is important and it will be yes.  But is it at the top of their list or near the bottom?  In Amazon’s case, it drives the business.  An example - Amazon has an annual multi-million budget just to improve the response time of its website.  A manager said in an interview with Bloomberg that if she can shave 0.1 second off, revenue would increase by tens of million.  Now if the IT manager of a large local retailer asks the CEO for half a million to improve their website response by say, one second, what do you think will be the response?  No!  This is the gulf between old culture and new in the treatment of customers.  In the same article, Jeff Bezos said “In the old world, you devoted 30% of your time to building a great service and 70% of your time to shouting about it. In the new world, that inverts” and further, Amazon “obsesses over customers”.

Aping does not solve the fundamental problem

‘Culture eats strategy for business.’ - Peter Drucker

Banks today fear the impact of fintech.  But their strategy seems to be to work with fintech and copy their processes with hackletons and open workspaces.  This is exactly what many large traditional retailers are doing in their response to Amazon, aping in the heavy use of tech.  Such an approach only touches the surface.  Banks and other organisations concerned with transformation really should execute like Jeff Bezos and inculcate a different operating culture.  If they wait and see what rivals introduce, then try to match and one-up it, they will always be followers, not innovators in a period of change.  Like Borders (a bankrupt book seller, competing with Amazon), it may be too late when they finally realise they are doing it wrong.
To take the lead, to innovate, it’ll help if businesses are able to grasps the operating culture of the digital economy (New Culture).

What is New Culture?

Today’s organisation culture can be described as top-down command-control driven and inward-looking, the latter due to the environment.  Ronald Coase’s famous theory of firms explains why.  Organisations are defined by internalising ie. work are mostly carried out internally because the process of trusting external resources is expensive.   It is far cheaper to do things within the organisation even if there are better resources without.  The result is fatter organisations with a more complex form, a structure required to carry out work more efficiently.

But with the internet, the environment has changed.  External resources can be tapped as trust can now be engendered at a far lower cost.  The example of Alibaba is compelling.

’What has provided a lifeline to Alibaba is the user-generated rating systems for the thousands of online small merchants that Alibaba would otherwise have no way to police.’
                                                                               - China Daily Asia Weekly, 12.08.16
User-generated review is a form of crowdsourcing. (Crowdsourcing is a technique employed to engage the public with intent but in an informal manner to participate in an activity.)  If Alibaba did not use crowdsourcing, it would have to build a huge internal team to traverse China to rate the merchants (which is how most firms today accomplish similar task).  This would have costs hundreds of millions of dollars and probably be less effective.

Another example is AirBnB. When selecting accommodation, we shortlist it if the ratings and customer reviews are good.  Previously hotels use branding, costly, to achieve this. Today we still trust brands but we trust user reviews more.

The result (from crowdsourcing) is that organisations are leaner, cheaper to run and with less bureaucracy, the organisation structure flattens.  This is evident when one compares large internet firms (Google, Facebook, Amazon) to the large industrial conglomerates (GE, Boeing, Sears).  The former produces similar large revenue with less workforce and expense.

         Wyndham                AirBnB
         1974                         2008
         8000                         0
         32000                       2000
         $7b                           $30b    

        The world's largest hotel chain founded in 1974 has 8000 hotels & 32,000 employees.

New culture as demonstrated now embraces externalisation of work.  Crowdsourcing is one aspect and as shown is now a business tool, that if used correctly saves the firm costs.

Besides customer-centricity, new culture is also data-driven.  Firms have always used data but in the digital economy, the role of data has been elevated.  What Google sees, telcos do too but little is done to monetise it while Google built a billion-dollar search business out of data.  There are other similar examples where tech startups take advantage of data that traditional firms miss.  The latter thus becomes mere followers while being early-movers would have advantaged them in a competitive industry.

“Since Alibaba’s logistics offshoot Cainiao launched its big data-backed smart solutions for fast delivery of orders in 2015, the nation’s major logistics companies have followed the trends to improve efficiency” – China Daily Asia Weekly, 18 Nov 2016.
To be able to see the insights that Google or Alibaba saw, traditional firms need a different mindset.  Executives need to embrace the new culture which is really internet culture.

Culture is a huge topic.  I will conclude by summarising key characteristics.

Today’s organisation culture                  New culture (exemplified by tech startups)

Highly structured, many layers                    Flatter organisations, less structure
Top-down command-control                         More democratic and bottoms-up
Bureaucracy                                              More trusting, open, less rules
Internalisation                                            Adds externalisation
Limited collaboration                                  Highly collaborative
      (partners through contracts)                       (adds the public and non-traditional partners)
Tend to withhold eg. information                  Willingness to share
Contract work                                            Volunteerism
Everything is paid for or charged                  An element of free
Internal (staff)-centric                                  Customer-centric
Complexity                                                Simplicity
Data is incidental                                        Data-driven, data has value
Inward looking                                            Open

From the list, one can conclude that the foundation of the digital economy is openness compared to the closed (less open) traditional organisation culture.

©Thet Ngian Chen, (2012, 2013, 2014, 2015, 2016).  Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Thet Ngian Chen and with appropriate and specific direction to the original content.

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