Wednesday, November 28, 2012

How Amazon combatted the known, the unknown and the unknowables

The Danish physicist, Neils Bohr once said – “Prediction is very difficult, especially about the future.”

It was ironic, however that his deterministic model of the atom was discredited by the probabilistic works of Schrodinger, Heisenberg and Einstein. These men established that uncertainty exists at the sub-atomic level. Perhaps, one wouldn't be wrong in saying that uncertainty is intrinsic to the nature of our being. In the context of strategic planning and decision making, uncertainty brings with it what we identify as risks. In business however, there aren't any rewards without risks. That being said, it is essential to mitigate the inherent risks by planning.

 In my opinion the risks in business have increased over the last few decades. Much of this is due to an increasingly volatile business environment due to better connected-ness. The speed at which the effect of change in one industry cascade to others is phenomenal. Businesses very rarely operate in isolation anymore.
The strategic decisions made by Amazon in the 1990s and in early 2000s are interesting to analyze as the company came out on top in a very dynamic industry. Amazon was founded by Jeff Bezos in 1994 as a e-Commerce website focused on selling books. In 1997, the company made its initial public offer. At that time, the risks that the company should’ve identified for itself in the strategic planning process were plenty.

The three categories that risks can be boxed into are the
Known risks: the risks whose impacts and likelihood is known. Eric Lamarre’s and Martin Pergler’s article discusses these at length. These are risks along the value chain comprising of the uncertainties around competition, supply chains, distribution channels and customer response.
Unknown risks: the risks which are caused by a disruptive change in the industry or technology which cannot be foreseen over a long duration of time. Tackling unknown risks in a technology based industry ties up with the innovation strategy of any organization.
Unknowable risks: the black swan events – high impact events with a ridiculously low probability of occurrence.

Bezos’ company seems to have planned for all these risks remarkably well. I take some liberty here when I say that, the business model(s) of company as it exists today  maps almost magically to each one of these risk categories. Nevertheless, it is the strategic decisions that Amazon made in the early years that allow it to be successful today.

Amazon's initial business model was a textbook example of the known risks. It was likely to be impacted by changes in any of the components of the value chain. In retrospect, Bezos seems to have mitigated this risk appropriately by expanding out of the book selling model to a model tapping into the long tail of the general retail industry (beyond the obvious diversification of the supply chain).

With the benefit of hindsight, we could expect a creative strategist in the executive chambers of  the company to have said – “We’ve digitized the procurement of books. Can someone digitize books altogether?”. Perhaps, a reason why the company now has a business line called ‘Amazon Digital’ which manufactures and sells eBook readers and eBooks.
It is the unknowable that caused Amazon to establish itself as a visionary company. The unknowable risk shaped up to be an unknowable opportunity in the later years - Amazon Web Services (AWS), valued currently at $2 Billion created a new market and gave Amazon a huge first mover advantage in the 'blue ocean' space of Cloud computing - Software as a Service, Infrastructure as a Service and Platform as a Service. The formative step towards this revolutionary business model was a masterstroke by Bezos in 2001. Bezos issued a mandate forcing data to be shared internally within Amazon only using service interfaces. No other forms of data sharing were allowed. This caused Amazon to develop the foundation and the underlying infrastructure which was used extensively in AWS, which emerged as a front-runner in a revolutionary industry.

The question that remains to be answered however is - if the web services mandate was a by a genius strategist? Or, was it just a case of pure luck?

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