If the Key to Business Success Is Focus, Why Does

BUSINESS MODELS

Amazon Work?
May 21, 2019

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Harvard Business School professor Sunil Gupta explores the infiltration of Amazon into dozens of industries including web
services, grocery, online video streaming, content creation and, oh, did we mention physical bookstores? What’s the big plan?
Is the company spread too thin, or poised for astronomical success? Learn more about this discussion in his case, “Amazon
2019.”

20:53

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TRANSCRIPT

BRIAN KENNY: In the world of computer science, Jon Wainwright is kind of a big deal. A pioneer of computer languages, he
was the principle architect of both Script 5 and Manuscript. What makes Jon a legend has nothing to do with programming.
Let me explain. On April 3, 1995, Jon was in need of some work-related reading material. So, he fired up his T1 modem and
navigated the fledgling internet to the beta version of a new online bookstore. With the click of a mouse, he became the very
first customer to make a purchase on Amazon.com. Fluid Concepts and Creative Analogies, the book he purchased, never
became a best seller. But Amazon took off like a rocket ship and hasn’t slowed down since. With a market cap larger than all
other retailers combined, including Walmart, Amazon owns 49% of all online sales. In the time it takes me to read this
introduction, the company will earn over 300,000 dollars. Will we ever see the likes of it again? Today, we’ll hear from
professor Sunil Gupta, about his case entitled, “Amazon in 2017.” I’m your host Brian Kenny. You’re listening to Cold Call, part
of the HBR Presents network.

Sunil Gupta is an expert in the area of digital technology and its impact on consumer behavior and firm strategy. He is the
author of the recently published, Driving Digital Strategy, a guide to re-imagining your business. This case is the perfect stepping
off point to cover some of the ideas in that book, Sunil. Thank you for joining me today.

SUNIL GUPTA: Thank you for having me.

BRIAN KENNY: This is your second spin I think on Cold Call. We appreciate you coming back.

SUNIL GUPTA: I enjoy doing this.

BRIAN KENNY: Good, as long as it’s not too painful for you. I like having you here. I’ve had an opportunity to read the book.
The case I think is really kind of a great foundational piece to launch into some of the ideas. I’m going to assume anybody
listening to this podcast has purchased something on Amazon or watched something on Amazon Prime. I had forgotten about
their modest beginnings and just how much they’ve grown and expanded and changed. The case was a great reminder of that.
We’ll get into some of that. Let me start by asking you, just to set it up for us. What led you to write the case?

SUNIL GUPTA: As you said, everybody knows Amazon. At the same time, Amazon has become quite complex. I mean, they
have gone into businesses that defy imagination. That raises the question, is Amazon spreading itself too thin? Are they an
online retailer? Are they video producers? Are they now making movies? In strategy, we learn, everybody should focus.
Obviously Jeff Bezos missed that class.

BRIAN KENNY: He didn’t come to HBS by the way.

SUNIL GUPTA: You sort of start wondering as to, what is the magic behind this? What is the secret sauce that makes Amazon
such a huge success? The market gap almost touched a trillion dollars a few months ago.

BRIAN KENNY: Insane.

SUNIL GUPTA: That was the reason why I thought A, everybody knows about it, and B, it’s hugely successful and C, his
business model seems to defy logic.

BRIAN KENNY: The case we know by the title takes place in 2017. Maybe you can just start us off by setting it up. How does
the case open up?

SUNIL GUPTA: At that point in time, Amazon had just bought Whole Foods, which was very counterintuitive because Amazon
has been an online player. So why is it getting into offline business? That was against his grain as an online player. The second
thing is food is a very low margin category. You sort of say, Amazon is a technology company, its stock is going to
stratosphere. Why buy a low margin business that Amazon actually had been trying Amazon Fresh for 10 years and hasn’t
succeeded? Why don’t they give up? That was a starting point. But of course, the case describes all the other 20 different
things that they have done in the last 20 years and asked the question, what is Amazon up to?

BRIAN KENNY: Amazon and Jeff Bezos are sort of synonymous. He’s a cult of personality there, kind of like Steve Jobs was
with Apple. Jeff’s been in the news a lot lately for other reasons, you know, personal reasons. He is still obviously, probably one
of the best known CEOs in the world. What’s he like as a leader?

SUNIL GUPTA: I don’t know him personally. Based on the research that I’ve done, he certainly is very customer obsessed. He’s
focused on customer. He always says, “You start with the customer and work backwards.” He still takes evidently calls on the
call center. The culture is very entrepreneurial, but also very heart driven. I mean, the idea for example of Amazon Prime
evidently didn’t come from Jeff Bezos, it came from a low person in the organization. He’s quick to adapt the ideas if he sees
some merit in it. It’s almost a 25-year-old company that still works like a startup.

BRIAN KENNY: Was the original concept for Amazon … I mean, I know he sold books originally. Was it ever really a book
company?

SUNIL GUPTA: I think it started more as an online retailer. Book was an easy thing because everybody knows exactly what
you’re buying. It’s no concern about the quality. His premise in the online store was a very clear value proposition of three
things. One was convenience that you can shop in your pajamas, so we don’t have to fight the traffic of Boston or Los Angeles.
The second was infinite variety. I don’t have the constraint of a physical store. Even if I have Walmart, which is a huge store, I
can only stock so many things. As a result, you only have the top sellers. In Amazon, I can have the long tail of any product if
you will. The third was price. It was cheaper, simply because I don’t have fixed costs of the brick and mortar store. I can
reduce the cost structure and therefore I can be cheaper. Those were the three key value propositions. That’s how it started.
The idea was, I’ll start with books and then move on to electronics and other things. But then of course, it moved far beyond
being an online retailer.

BRIAN KENNY: This gets into some of the ideas in your book. I was really intrigued in the book about the notion of what kind
of business are we in? Just that question alone. At face value, it looked like Amazon was a retailer. They went in directions that
nobody could have imagined. The case really goes into some of a litany of all the things they tried.

SUNIL GUPTA: Right. Again, the purpose of the case was to illustrate as to how these are all connected. From a distance they
look completely disconnected and completely lack of focus. Let’s start with how the concept evolved. The first thing was, as I
said was online retailer. Very soon it became a marketplace. Now, what is a marketplace? They basically allow third party
sellers also to sell on the Amazon platform, which is distinct from a traditional retailer. Walmart doesn’t allow me to set up
shop within Walmart, but Amazon allows me to do that. Now, why would they do that? Simply because it increases the variety
that they can sell on the platform. Therefore, consumers are quite happy with the variety of the product they can get on
Amazon. Amazon gets commission without having the inventory and the capital cost. Perhaps the most important thing of
becoming a platform is it creates what we call the network effects. If there are lots of products, everything I can buy is
available on Amazon. More consumers are likely to go there. Because there are more consumers, more sellers are likely to go
there. It just feeds in itself. More consumers mean more sellers, more sellers mean more consumers, and it becomes a virtual
cycle. That’s why there is only one Amazon. Even if I start an online retail, which is in many ways better than Amazon,
nobody’s coming to gupta.com, because buyers and sellers are not there. That became the next phase, change from online
retailer to marketplace. Then it went into AWS, and you sort of say, “Well, how can it go into a technology company and
compete with IBM and Microsoft?” It was competing with Walmart before.

BRIAN KENNY: That’s the web services division.

SUNIL GUPTA: That’s the web services. In fact, at that point in time, Wall Street was very down on that. They said, “What is
Bezos thinking?” The idea again, if you think about it, it was very simple. Amazon was building this technology for its own
purpose. And then, they started giving this technology, using this technology for the third party sellers, who were selling on its
platform.

BRIAN KENNY: Let me just interrupt for a second. That’s a marked, a marked change in direction. They had always been a
consumer platform. Now they’re in a business-to-business play. I bet a lot of consumers don’t even know about Amazon Web
Services.

SUNIL GUPTA: Correct. Again, not in a traditional sense saying, “This is my market.” That’s simply saying, “I have this
capability. There’s a demand for this capability. Can I do it?” Part of that was opportunistic also. If you remember in 2001, the
dot.com bubble crashed. If you’re a B2C company, you hedge your bets and get into B2B business. Part of that may have been
luck. That was, again, a change of direction. And then, Amazon started producing hardware, Kindle, and now competing with
Apple. You sort of say, why is an online retailer getting into hardware production? If you think a little bit about it, the answer
is very easy. Kindle was designed to sell eBooks as people move from buying the hard copy books to downloading the eBooks.
The Kindle is the classic razor and blade strategy. I sell razors cheap in order to make money on the blades. I’m not making
that much money Kindle, but I’m making money on eBooks, which is very different from Apple’s strategy. Apple actually
makes money on devices, but Amazon is not making money on devices, or at least not making huge money on devices.
Similarly, it moved into online streaming of the video content and suddenly became a competition on Netflix. You sort of say,
“Why is a retailer becoming a competition on Netflix?” Again, if you think a little about it, the answer becomes clear. As you
and I moved on to not buying DVDs, but actually streaming the stuff, that’s what Netflix did. They used to send the DVDs to
us.
BRIAN KENNY: I remember that. I still have a couple.

SUNIL GUPTA: Amazon is very good in sort of moving with the customer. If the customer moved from buying books to
eBooks, I move in that direction. If customers move from buying DVDs to streaming, I move in that direction. Now, can
Amazon do it? Of course, they can. They have AWS. Netflix is one of the largest customers.

BRIAN KENNY: Are they leading or following? Are they creating a market? In the beginning it seemed like they created
something entirely new. Now, are they anticipating, or are they just sort of reacting to what’s happening?

SUNIL GUPTA: No, it’s a combination of both. In some ways they are actually following the consumer behavior and say
consumers are moving to a streaming and move with that. They were not the first ones. Netflix actually started the streaming
thing. Then, they sort of come up with it. If you think about it, Amazon became not only distributing third party content on
videos, but now they have Amazon Studio. I mean, they are making movies, and the competition now becomes Hollywood
instead of Walmart. You sort of say, “What has gone wrong with Jeff Bezos? Why is he making movies?” Movies are pretty
expensive business and highly risky. The key to that is to understand the purpose of the movies. The purpose of the movies is
to hook the consumers from Amazon Prime. If you remember, Amazon Prime started with 79 dollars per year. The benefit at
that time was two-day free shipping. Now, you and I are smart enough to sort of do the math in our heads saying, how many
shipments do we expect next year, and is 79 dollars worth it or not? Bezos does not want you to do that math. He basically
says, “Oh, by the way, I’ll throw in some free content, some free music, some free unique movies.” Now you can’t do the
calculation. Why does he care about Prime? Right now, Amazon has about one hundred million Prime customers globally.
Let’s say I get an average 100 dollars per year, that’s 10 billion dollars in my pocket before I open the store.

BRIAN KENNY: Right.

SUNIL GUPTA: The research also shows that Amazon Prime customers buy three to four times more than non-Prime
customers. I mean, if you’re a Prime customer, you don’t even price shop.

BRIAN KENNY: Once you’re Prime, you’ve got to justify being a member. You buy everything on Amazon.

SUNIL GUPTA: Exactly. Your purchase increases. You become price sensitive, which is fantastic. In fact Jeff Bezos has gone
public and say that every time we win a Golden Globe award for our content, we sell more shoes. The purpose of creating their
own content is not to make money on the content. This is another different razor to sell you more shoes. Once you understand
that, what looks like disparate business is actually extremely tied together.

BRIAN KENNY: It all comes right back to the core. They haven’t always had good ideas. Have they had some misses along the
way too?

SUNIL GUPTA: I think the biggest failure was Fire phone.

BRIAN KENNY: Remind us what that was?

SUNIL GUPTA: Amazon launched their own phone. They were obviously very late in the market. iPhone was already there.
Samsung had done very good. You have two major players, if not many others, who are very well established. Consumers love
their iPhones. The question of course was, why is Amazon launching the phone? What are the odds of success? Clearly the
odds of success were low. The reason to launch it was they didn’t want to be beholden to the iPhone or the Googles of the
world. They know that the world is moving towards mobile, in terms of shopping, certainly in emerging markets, everybody’s
moving to mobile shopping. If tomorrow Apple or Google sort of restrict the Amazon use, or availability of Amazon, because
they’re all competing with each other now. It becomes a challenge. To Amazon’s credit, I mean, it’s true for all innovations.
Not all innovations succeed. You’ve got to take a shot. If you think about it, all the technology and thought process that got
into Fire phone, was not completely a waste. That went into Echo. Now Alexa is a big hit.

BRIAN KENNY: They’re a market leader in that in that. Let’s talk a little bit about the ideas that underlie his Amazon case. I
think it starts with knowing what business you’re in. Your book addresses this. I think I know we’re in the education space
here at Harvard Business School. Should we be thinking about other businesses?

SUNIL GUPTA: You’re right. The bigger question that Amazon case raises is: how do you define what business you are in?
Most of us tend to define business by the traditional industry boundaries. If I’m a bank, I’m in banking and other banks are my
competition. I think industry boundaries are getting blurred today. Amazon can get into banking. I have lots of customers, I
can start giving loans to small and medium enterprises.

BRIAN KENNY: They know a lot about those customers.

SUNIL GUPTA: They know a lot about customers. The key asset is now customers and data, and not the product and services
that you offer. Once you know about customers, you can do lots of different things. One thing is, I would say is the industry
boundaries are getting blurred. You need to think about not competition, but what do customers want. Do I have capabilities
to serve that? The second thing is the traditional definition of where competitive advantage comes from is changing. What I
learned, in doing my MBA class many years ago, we used to read Michael Porter’s competitive strategy stuff. If I were to
simplify and summarize what I learned in competitive strategy was competitive advantage comes from making your product
better or cheaper. Differentiation or cost leadership, which makes sense. If you think about it, it’s very much product-focused.
I think in today’s world, competitive advantage comes from connecting products and connecting customers. The Kindle and
eBooks is an example of connecting products, multiple products right? Making movies of Amazon and selling more shoes is
connecting products. Razor and blade have been around forever. I think what is different today is razor and blade could be in
completely different industries. Movies and shoes. The other side is connecting customers. We are in a network economy.
That’s why there is only one Facebook, or one WhatsApp. If you are the only person on Facebook, what’s the value of
Facebook? Not much, unless you love yourself. As more and more people get onto Facebook, the value of Facebook increases.
It’s not about improving product. Without changing product, Facebook value increases. I think in this connected world that
we live in, it’s about connecting products and connecting consumers.

BRIAN KENNY: We’ve got a lot of listeners out there. Many of whom are probably leading firms of one kind or another. How
do they even go about exploring redefining their business?

SUNIL GUPTA: I think again, you need to think about what is your key asset? Everything starts with the consumer. In the
Amazon case, you move with the consumer to some extent. I asked the same of a company for a medical device manufacturer.
I said, “Who’s your competition?” The typical answer is: the other medical devices. Medical business is now becoming a lot
about data. Google is getting into that. Apple. iPhone is becoming a medical device. Suddenly you have a very different kind of
player getting into this thing. When I say, “What business are you in?” You need to think about who might actually get into
that business and that changes the whole picture.

BRIAN KENNY: Why is Amazon so good at engaging customers?

SUNIL GUPTA: I think it comes from the culture of being customer obsessed, that no matter what the customer is right. They
deliver on that promise. I mean, the level of convenience that customers expect from companies has changed. It used to be, if a
company delivers a product within a week, that was considered good. Now, if you don’t deliver on the same day it just seems
awful. They’ve raised the bar in everything. Of course, they’re using technology very effectively, whether it’s in their
warehousing, whether now they’re investing in drones. I think they’re still a 25-year-old startup.
BRIAN KENNY: That’s another point that I wanted to touch upon. They’re able to adapt their supply chain it seems almost
effortlessly to whatever business direction they move in. Is it possible for another entry to come into this space and scale in the
same way that Amazon has? Is this a once-in-a-lifetime type thing?

SUNIL GUPTA: That’s a tough question. I think Amazon, it’s not that they’re adapting supply chain for everything, right? For
example, I don’t think Amazon supply chain is ready for delivering frozen food yet. If I have a supply chain to ship you
electronics, I can use the same supply chain to ship you prescription medication. That opens up another billion dollar, several
billion dollar market. If I call myself an online retailer, I will never think of prescription drug delivery. If I think of my
capabilities, I have the warehouse to deliver electronics and books. Why can’t I deliver your prescription medication? That
opens up completely different businesses.

BRIAN KENNY: What are the kind of pitfalls that you need to be careful of, as you start to move into adjacent markets?

SUNIL GUPTA: I think definitely the big challenge is: how far do you go? On one hand it’s good to expand the business scope
because the industry boundaries are getting blurred. The danger is do you lose focus? The classic challenge of losing focus.
There’s a balance. I think in Amazon’s case, if you notice, everything is very tightly connected. If you remove one part, the
whole becomes less. That’s the key question: are the pieces fitting together nicely, or they just happen to be another business
because it’s profitable?

BRIAN KENNY: We’ve done a couple of cases on Cold Call that touch on the organizational impact of firms that move into
new businesses. Some of them are examples of where it’s benefitted the employees. In other cases, it seems to have disrupted
the culture in negative ways. How do you see this playing out at Amazon? Does it impact them in any way?

SUNIL GUPTA: If you look at Amazon, it has grown the top line 20, 25% every quarter without fail, except for one quarter in
2001. Right now, it’s in 2019, their sales are 232 billion. I don’t know that many companies, which grow at that rate, even
when they’re over 200 billion. I think, if you’re on a winning team, that as an employee, it has to energize you. If you are in a
culture which encourages experimentation and innovation, it has to excite you. At the same time, I’m sure it’s a very
demanding culture, and there have been reports about how demanding the culture of Amazon is. It probably is not for
everybody. For the people who are innovative, who are entrepreneurial, who want to be on a winning team, I’m sure it’s an
exciting place.

BRIAN KENNY: There are sort of shades of Apple there. I mean, I think Apple had the same reputation. You’ve discussed this
case in class with students.

SUNIL GUPTA: Oh, many students.

BRIAN KENNY: What are sort of the top line things that surprise you as you discuss it?

SUNIL GUPTA: The nice thing about this case is, everybody knows Amazon as a consumer. Everybody has shopped at
Amazon. It’s very easy case. In fact, it’s a very short case that I give, at the opening of most sessions. People see it as very
surface level. They sort of don’t realize the deep insights that comes out. As a three page case, you sort of say, I will be done in
ten minutes, but then you peel the layers of the onion. That was a shocking thing to them, as to how you peel the layers of the
onion and how you see the connection across different things. Why did Amazon buy Whole Foods? It makes no sense. Why
did they get into AWS? It makes no sense. When you start un-peeling that layer, you see the connection as to why Amazon is
doing all these different things. I think that’s the “A-ha” moment that comes across.

BRIAN KENNY: Much more on that in your book. How’s the book doing?

SUNIL GUPTA: Book is doing great.

BRIAN KENNY: Great.

SUNIL GUPTA: Fabulous. It was released in August. I’ve been going around on tour for many, different parts of the world.

BRIAN KENNY: I bet you can buy it on Amazon.

SUNIL GUPTA: You can certainly buy it on Amazon.

BRIAN KENNY: That’s great. Sunil, thanks for joining us today.

SUNIL GUPTA: Thank you very much Brian.

BRIAN KENNY: If you enjoyed Cold Call, you should check out HBS SkyDeck, a podcast series that features interviews with
HBS alumni from across the world of business, sharing lessons learned and their own life experiences. Thanks again for
listening. I’m host Brian Kenny, and you’ve been listening to Cold Call, an official podcast of Harvard Business School, and part
of the HBR Presents network.

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2 COMMENTS

Mihai Ionescu a month ago

With all due respect, Prof. Gupta, the concept of 'digital strategy' doesn't make a lot of sense to me. I know that you are co-chair of the executive program on
Driving Digital Strategy at HBS and therefore I hope that you'll not take my observations personally.
In your last year's book 'Driving Digital Strategy: A Guide to Reimagining Your Business', you say "... They don't treat digital strategy as separate from their
overall strategy. Instead, they lead with a digital-first mentality and make sure their digital strategy touches all aspects of their organizations.” In other words,
you entertain this concept of the 'digital strategy' replacing the Business Strategy, or of having the Business Strategy morph into a 'digital strategy', all across
the board. In my opinion, this is a fad, because it places the cart in front of the horses. This is why:
Whatever 'digital' thing you might be thinking of, it is nothing more than a capability, for any company you might consider. But the capabilities neither define,
nor drive the Strategy. They only make Strategy's Strategic Choices happen, bringing them to reality. Any Strategic Choice may follow a 'digital' route. Or not.
Without digital enablement, Strategy's overall goals may be harder to reach, or even unreachable, but that doesn't mean that the Strategy is driven by
anything else than the Strategic Choices.
That is true that the company Strategy& (ex Booz & Company) think otherwise, according to their Capabilities-Driven Strategy, but the fact is that their CDS
is the exception that confirms the rule. Of course, I am talking about Strategic Choices beyond the limited Generic Strategies (Price, Differentiation, Focus).
I'm talking about a lot more choices (dozens of them) defined along the two fundamental dimensions of Strategy (aka of strategic positioning): Market
Boundaries (where-to-play) and Competing Factors (how-to-win).
As a result, I can take any example in your book or in any of your articles on this subject and show that the companies that you say that they've undergone a
'digital transformation' are in fact enabling the Strategic Choices of their Business Strategy through digital technology capabilities. Neither more, nor less.
Therefore, the thing called 'digital strategy' does not really exist, in reality, and certainly not in lieu of the Business Strategy. I think that it might even be wise
to consider changing (at least) the name of the program you are co-charing from 'Driving Digital Strategies' to 'Business Strategy Enablement through Digital
Technologies'.
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