Amazon's announcement of plans for 30-minute delivery by aerial drone is not just excellent PR on the eve of Cyber Monday (although it is certainly that). The drone move is a classic example of pummeling competitors with an advantage they can never replicate, showing how companies with a clear strategy can keep less thoughtful rivals on the back foot.
Amazon's advantage has been obvious since the days of touting itself back in the mid-1990's as "Earth's Biggest Bookstore." The company has huge warehouses, massive selection, and ever-increasing strength in delivery logistics. All of these advantages stem from scale, but it would be wrong to say that Amazon's big differentiator is its size. After all, Walmart and Kroger have scale too, but they do not have the right facilities or customer relationships to sustain a drone strategy. Amazon's strategy hinges on two unique assets. First, it can launch sophisticated services based on large-scale regional facilities, whether they are Kiva's item-picking robots working in the warehouse, next-day delivery of pet food, or 30-minute delivery by drone. Aside from logistics firms such as FedEx that are its partners, no one else has the footprint to do this on a national scale. Second, Amazon has built strong relationships with power-buyers of online goods, people who see the $79 fee for Amazon's 2-day delivery Prime service as good value. 30 minute delivery caters to those customers. Walmart and Kroger, for all of the foot traffic and in-store promotional opportunities they have, do not possess that kind of customer relationship to leverage.
Of course that's not to say that these are Amazon's only advantages, given the particular dynamics of certain industry verticals. In book publishing Amazon has enough clout to force changes in how an industry operates, and in electronics its ability to quickly gather a critical mass of reviews about new products makes it an outstanding place to begin shopping. For the overall corporation, though, the regional facilities and customer relationships rule.
Seen through this lens, the drone attack -- however surprising -- makes perfect sense. So too does Amazon's tentative foray into same-day grocery delivery service. Both represent potentially giant new markets for Amazon, selling all sorts of goods wanted here-and-now, and they derive directly from the ways Amazon has sought to reap scale advantages since its early days. The drone infrastructure can create yet another facet to this competitive advantage, enabling entry into high-value, time-sensitive markets such as drug delivery that occurs even faster than filling a script at the corner drugstore.
This isn't to say that the new markets don't have their challenges. Amazon has had to experiment for years with its approach to food given the subtleties that online groceries have to get right. Drones have many practical issues to confront -- changing FAA regulations, becoming a tempting target for thieves, and collision avoidance among them. Yet it is heartening that Amazon isn't scared away by these problems. Indeed, the company seems to recognize them for what they are -- barriers to others entering the market successfully, and therefore guarantors of future competitive advantage if Amazon can surmount them.
These aren't just lessons for Internet companies. American Express has a big strategic advantage in the relatively high fee it charges merchants to process transactions, which enables the company to offer a rich rewards program to high-spending consumers who may not carry a revolving balance on their cards. Because the company has these high-spending consumers who are motivated to use their Amex cards, the company can charge merchants the hefty transaction fee, creating a virtuous circle that reinforces the strategic advantage. When the company offers its elite consumers new services, such as exclusive concert ticket reservations, competitors have a hard time matching the proposition. In a different vein, T-Mobile in the United States has long lacked the spectrum to satisfy data-hungry telecom customers, so it has concentrated on having a low cost base and highly competitive pricing. It is now able to undercut the industry leaders in ways that should pain the incumbents greatly to replicate, for instance by offering free international data roaming or a $10 a month fee that enables subscribers to upgrade fast to new phones. Others can win at alternative propositions, but in offering "good enough" signal strength with keen pricing T-Mobile is hard to beat for consumers who value that combination. Both companies keep the announcements coming, forcing competitors to stay on defense rather than focusing on a few core competitive advantages of their own.
As for Amazon, I've interviewed Jeff Bezos, and the man has multiple ideas per minute. When Bezos selects ideas to pursue, though, he is sharply focused on which ones might support Amazon's entrenched advantages. Amazon is all for pioneering new markets, but this is not haphazard wildcatting. The company's forays are judicious, patient, and relentlessly effective.
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