Peter Cohan is a Lecturer of Business Strategy and Entrepreneurship at Babson College. Starting July 11, 2017--take Cohan's free Babson X course, Digital Strategy and Action.
Amazon recently put itself in the media spotlight through its acquisition of upscale grocery chain Whole Foods. That news sent shares of rivals like Kroger into a nose dive -- costing shareholders billions.
This raises all sorts of questions: Why would a $136 billion online retailer growing at over 20% annually pay $13.7 billion to buy 456 grocery stores? How could Amazon possibly change Whole Foods enough to justify paying a 27% premium to control it? Beyond the short-term hit to their stock prices, how will Amazon's acquisition threaten the market share of other grocery retailers? How should Whole Foods's rivals defend their turf?
If I knew the answers to all of these questions, I would be much closer to Jeff Bezos's $84.5 billion net worth.
What I do know is that if Bezos is going to surpass Bill Gates as the world's richest person, Amazon must grow faster than 20% and that means it needs to keep adding nearly $30 billion in new revenue every year. If Amazon could take 5% of the $600 billion grocery market, it could get there.
And while Whole Foods's $15.7 billion in revenue gets Amazon half the way there, it remains unclear how Bezos will revive the grocer's growth and what rivals will do to hold on to their customers.
Amazon has been answering such questions since 1995 as it tackled the challenges of selling everything from books to diapers online and creating an industry leading cloud service.
And Amazon's success convinces me that you are missing out on a chance to make a difference in your workplace if you don't understand the fundamental principles underlying the successful digital strategies of Amazon and peers such as Facebook, Google, and Netflix.
Here are their four key success factors.
1. Obsessive Customer-focus
The most effective digital strategies make life better for customers. Companies like Amazon assume that regardless of how happy a customer may be with their product now, they always expect something better.
Amazon has a clear purpose -- to give customers a great product and excellent service at a lower price. But the way it realizes that purpose -- e.g., its capabilities -- are different for different product lines.
Unless your company is delivering customers the best remedy for their deeply-felt pain, your are missing the customer-focus boat.
2. Providing more for the money
To gain market share, a company must offer customers a better bundle of benefits for the money -- what I call value -- than competitors do. Since most startups fail, buying from a startup is risky. Therefore, I think a startup must strive to deliver what I call a Quantum Value Leap (QVL) -- at least 10 times more value than do competing products.
Amazon is in the position of a startup when it comes to the grocery business. Whole Foods is losing customers because its idea of selling organic products at high prices attracted rivals who provide similar products at lower prices. Reports that Amazon is considering cutting costs and prices at Whole Foods means that it could ultimately deliver a QVL to its customers.
Does your company offer customers a QVL or is it losing customers to rivals who do?
3. Superior execution
Giving millions of customers a QVL every time they buy is extremely challenging -- it depends on superior execution. And such execution requires performing individual business activities well and coordinating those activities so that customers give your company a very high net promoter score (NPS) -- a measure of their eagerness to recommend your company to others.
Amazon's $99-a-year Prime service has attracted 80 million customers and gets customers to spend $1,300 a year compared to $700 for non-members. Excellence at taking and fulfilling orders helps explain why Amazon enjoys an industry-leading customer satisfaction score of 86 and a 43% e-commerce market share.
Does your company have the highest customer satisfaction in your industry? If not, it is likely to be losing market share to companies that do.
4. Relentless innovation
Finally, a good strategy keeps changing so that a company is always ahead of evolving customer needs, new technologies, and an increasingly difficult competitive environment.
Bezos realizes that successful companies too often doom themselves by becoming complacent.That's why he talks about Amazon as always being at Day 1 -- so that it never gets to the point where it become vulnerable to hungrier startups. As Bezos said, "Day 2 is stasis. Followed by irrelevance. Followed by excruciating, painful decline. Followed by death. And that is why it is always Day 1."
Is your CEO more worried about protecting his pay and perks or on delivering customers the next big thing?
If your company is under threat from companies like Amazon, you need a deeper understanding of how to apply these principles. Starting July 11, 2017 you can take my free Babson X course, Digital Strategy and Action which will teach you how to
- Apply the five tests of a great entrepreneurial idea
- Use prototypes to discover the best product/market fit
- Maintain control by varying capital sources at four stages of startup development
- Win market share by delivering customers a quantum value leap
- Build a culture that attracts top talent and turns customers into advocates
- Chain five vectors into a sustainable growth trajectory
Watch the trailer and join the 3,873 people who have already signed up so you can harness the business principles driving the growth of the world's biggest fortunes.