The retailer-turned-tech firm exemplifies a powerful two-pronged approach to innovation.
In 1994, Jeff Bezos incorporated Amazon.com and billed it as “The Earth’s Largest Bookstore.” In July the following year, the site went live. By 1996, Amazon had $16 million in sales, while its dominant competitors, Barnes and Noble and Borders Books, had roughly $2 billion in revenue each.
Fast-forward twenty years. Today Amazon employs more than 150,000 people and is a $90 billion purveyor of merchandise ranging from books and music to toys, electronics, jewelry, sporting goods, industrial products, diapers, clothes, food, wine, furniture, and fine art. In 2013, Amazon revenue grew 22 percent compared to Walmart’s 2.2 percent increase. It achieved revenues of $50 billion in sixteen years, half the time it took Walmart to hit this number. A McKinsey study indicated that compared to its five largest competitors, Amazon has roughly seven times the assortment of goods, 5 to 13 percent lower prices, and 13 percent higher customer satisfaction scores. Amazon also spends 6 percent of sales on R&D, three times the amount other retailers spend. Meanwhile, Borders has declared bankruptcy, and Barnes and Noble is struggling. In the words of a recent book on Amazon, it has become “The Everything Store.”
How did an online bookseller that held no inventory of its own transform itself in two decades into one of the preeminent technology firms in the world?
But in some ways, this comparison understates Amazon’s accomplishments. Today Amazon is far more than an online retailer; it is a premier technology company, providing a cloud computing platform on which other firms, ranging from retailers like Target, nonprofits like Major League Baseball, pharmaceutical firms like Novartis, and government agencies like the CIA can operate their online businesses (Amazon Web Services). It is also a services and distribution company that stores and delivers products from other firms (Fulfillment by Amazon), a video streaming company (Amazon Instant Video), an electronics hardware firm (Kindle and the Fire smartphone), a video production company (Amazon Studios) competing with Apple and Netflix, and, recently, a publisher of books (Amazon Publishing). The technology consulting firm Gartner has estimated that Amazon Web Services has five times more computing power than the fourteen other cloud computing companies on the market, including IBM.
How did an online bookseller that held no inventory of its own and bought books from wholesalers like Ingram manage to transform itself in two decades into one of the preeminent technology firms in the world?
Bezos, the founder and CEO of Amazon, was an early believer in the disruptive potential of the Internet. He began with the idea for an online retailer by thinking about what categories of goods would sell best over the Internet. His vision was for an Internet company that served as the intermediary between customers and manufacturers and sold nearly every type of product all over the world. Books jumped out at him as one of those pure commodities where buyers knew exactly what they were purchasing and the product could easily be sold online.
His initial model was to advertise books on a website (Amazon.com); when a customer ordered the book, Amazon would purchase it through a book wholesaler and ship the book to the customer. The beauty of this was that Amazon held no inventory, could offer an immense selection, and had a negative operating margin (the customer paid before the book was shipped, but Amazon didn’t pay the wholesaler until the end of the month). It also allowed the company to offer a far more expansive selection than any bricks-and-mortar store could hold.
Bezos’s philosophy, which is still true today, has always been that Amazon doesn’t make money when it sells things; it makes money when it helps customers make purchasing decisions. This philosophy underpinned Amazon’s meteoric success—by 2000 it would record $1.6 billion in revenue. As a result of its rapid initial growth, chaos ensued around stocking and shipping, which led the company to invest in warehouses and more and more sophisticated fulfillment technologies. In 2002—with products diversifying and stock ever-growing—the decision was made that if Amazon were to truly offer value to the customer, distribution needed to be a core capability of the company.
Enhancing their fulfillment model spurred more exploratory efforts to partner and conduct online sales for other retailers, to broaden their own product selection, and ultimately gave rise to Amazon Prime—which initial financial analyses indicated would be a money-losing proposition, but Prime, on average, doubled spending on the site.
Bezos has constantly supported this risk-taking culture, pushing the company to explore areas outside of Amazon’s core business. Doubling down on distribution and fulfillment capabilities is far from the only example of this: The company has funded a number of separate exploratory units—A9, a product search engine developer; ClickRiver, an advertising service; mTurk, a lab exploring the use of human intelligence and crowdsourcing for solving difficult problems; and Lab126, which gave us the Kindle and Amazon Instant Video—just to name a few.
Bezos has constantly pushed the company to explore areas outside of Amazon’s core business.
These efforts, though seemingly disparate, have a common goal: developing the capabilities needed for Amazon to become a technology platform as opposed to an online retailer. Led by programmer Rick Dalzell, this innovation effort originated in an attempt to reduce the bottleneck that slowed IT projects. Dalzell and his team created a service that allowed developers to run any application on Amazon servers and though it was originally designed to speed up internal developments, people soon realized that this service, known as elastic cloud computing (EC2), could be useful to developers outside the company. This, in conjunction with another project known as simple storage solutions, or S3, and several other in-house software applications, became what is now known as Amazon Web Services. Today AWS is a separate cloud computing business that brings in $6 billion in revenue and is growing rapidly.
Underneath the company’s many shifts—from selling books to a broad array of merchandise, selling its own products to being an online storefront for other retailers, selling products to being a distribution and fulfillment powerhouse, and serving as a distributor to focusing on cloud computing, video streaming, and production—lies a story of leadership and organizational ambidexterity. The leaders of Amazon were able to exploit mature businesses like retail sales and distribution, in which efficiency and incremental improvements are key, while simultaneously leveraging existing assets and capabilities to explore new domains where flexibility and experimentation are tops.
What it takes to explore is different from what it takes to exploit—managers need to recognize the need to manage multiple alignments—in other words, to be ambidextrous. The firm has to simultaneously pursue incremental innovations that streamline and optimize the business’s core capabilities (cutting costs, improving customer experience), while also assertively exploring new business concepts and markets—an organizational alignment that calls for speed, initiative, and adaptation.
In Bezos’s words, “There is a ton of fine-grained innovation that happens on a daily basis… things that make our operations more efficient and lower cost…. At the other end is large-scale innovation like Kindle, Web Services, and Amazon Prime.” He explicitly endorses the need for ambidexterity and the opportunities that large companies have to support it.
Amazon has mastered this, and in their relentless pursuit of new markets and products, it has built a culture that is “purposeful Darwinism,” emphasizing an obsession with the customer, a bias for action and constant experimentation, frugality, direct feedback, and the continuous measurement of results. As some have noted, this can create a stressful, competitive environment that doesn’t appeal to everyone. But it also has helped the company excel in mature businesses like fulfillment and experiment in new ones like video streaming. This approach ignores the conventional strategic wisdom about “sticking to your knitting” or focusing on “core competencies.” Instead, it emphasizes the capabilities for long-term success by exploiting short-term incremental innovation and providing the resources and senior management support for exploration.
In the innovation game, it is easy for firms to fall into one-track thinking: How can we optimize our existing business model? But exploration is the path to changing the game in any given industry; it is what allows companies to discover the future before their competitors do. For leaders—and, really, everyone involved in winning organizations—this is an electric possibility. But this possibility of leading ambidextrously requires emotional and strategic clarity and the ability to embrace contradiction.
This post was adapted from Lead and Disrupt: How to Solve the Innovator’s Dilemma.
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Charles A. O’Reilly III is the Frank E. Buck Professor of Management at Stanford University’s Graduate School of Business and co-author of Winning Through Innovation and, most recently, Lead and Disrupt: How to Solve the Innovator’s Dilemma. He and Michael L. Tushman are co-founders and co-directors of Change Logic, a consulting practice that helps firms, CEOs, and senior teams innovate and thrive.
Michael L. Tushman is the Paul R. Lawrence MBA Class of 1942 Professor of Business Administration at Harvard Business School and co-author of Winning Through Innovation and, most recently, Lead and Disrupt: How to Solve the Innovator’s Dilemma. He and Charles A. O’Reilly III are co-founders and co-directors of Change Logic, a consulting practice that helps firms, CEOs, and senior teams innovate and thrive.
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