Wednesday, April 12, 2017

Should "coherence premium" be the only priority?

Amazon announced at the beginning of this year that they are going to bring their first ever physical store for groceries and retail to Seattle. Starting by selling just books in 1994, Amazon today has grown into the largest internet based retailer in the world by total sales and market capitalization. 
This was made possible by a mixture of both- retaining core differentiated capabilities as well as aggressive expansion. Paul Leinwand and Cesare Mainardi in their article “The Coherence Premium” suggest that when firms focus on the top line instead of building differentiated capabilities, they are headed in the opposite direction of success. I believe this is not always true. To conquer the market, firms must pay heed to expansion too, and the growth of Amazon is the right example to shed light on this perspective.

Let us first understand the ‘coherence premium’. The authors of the article suggest that a firm must first identify its capabilities and build them in a way that they support each other. Once it has figured out the capabilities, then the firm must work towards dominating the market over its competitors and interlocking the market. Amazon too has identified its capabilities which include a robust warehouse-distribution operation, customer-friendly online interface and skilled data analytics force. The authors also mention that once the core capabilities are identified, the firms must decide on the “way to play”. Amazon’s way to play was to be the "Earth's Most Customer Centric Company." This is embedded in all of the employees of Amazon and all core capabilities support this “way to play.”

While we can agree that these capabilities have enabled Amazon to grow into what it is today, I would argue that other factors have contributed equally, if not more. For instance, when Amazon started with selling books, that is all the management knew. The firm had no experience with selling retail or everything else in the world today. The core capabilities required to sell books are different to those required to sell other retail items such as clothes or sporting goods.

However, if Amazon stuck to its core capabilities and stayed within the bounds of the books market, things would have been different today. Instead, Amazon chose to experiment by expanding its portfolio from books to everything else. Rather than pulling the profits down, this enabled Amazon to increase profits and become the market leader. This justifies well why firms should be aggressive and expand as well, along with focusing on the core capabilities. Amazon has not stopped at online retail. 

It has invested in Artificial Intelligence (Alexa), Cloud services (Amazon Web services) and the newest Amazon stores. There is no stopping Amazon and it will continue to teach us more lessons in strategy development.
Apart from Amazon, many other leaders of different markets have done the same. Apple, for instance, started with making computers. Although, that is what its core capabilities were built around, Apple did not stop either. It expanded into the music player market by introducing “iPods” and the smart phone market with “iPhones” and now have conquered these markets.

In conclusion, firms must lay equal emphasis in their strategy development to expanding as they do for their core competencies.

References:

Amazon largest internet based retailer- https://en.wikipedia.org/wiki/Amazon.com

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