What separates business winners from the losers? A lot of pundits would say you need to be efficient, cost conscious and manage margins. Others would say you need to be really good (excellent) at something – much better than anyone else. Unfortunately, that sounds good but in our fast-paced, highly competitive world today those platitudes don’t really create winners. Success has much more to do with the ability to shift. And to create shifts.
Think about Amazon.com. This company was started as an on-line retail channel for books most stores would not stock on their shelves. But Amazon used the shift to internet acceptance as a way to grow into selling all books, and eventually came to dominate book sales. Not only have most of the small book stores disappeared, but huge chains like B. Dalton and more recently Borders, were driven to bankruptcy. Amazon then built on this shift to expand into selling lots more than books, becoming a force for selling all kinds of products. And even opening itself to become a portal for other on-line retalers by routing customers to their sites, and even taking orders for products shipped from other e-tailers.
More recently, Amazon has taken advantage of the shift to digitization by launching its Kindle e-reader. And by making thousands of books available for digital downloading. By acting upon market trends, Amazon has shifted quickly, and has caused shifts in the market where it participates. And this shifting has been worth a lot to Amazon. Over the last 5 years Amazon’s stock has risen from about $30/share to about $180/share – about a 45%/year compounded rate of return!
In the middle to late 1990s, as Amazon was just starting to appear on radar screens, it appeared like Sears would be the kind of company that could dominate the internet. After all Sears was huge! It was a Dow Jones Industrial Average (DJIA) member that had ample resources to invest in the emerging growth market. Sears had a history of pioneering markets. It had once dominated retail with its catalogs, then became a powerhouse in free standing retail stores, then led the movement to shopping malls as an anchor chain, and even used its history in lending to develop what became Discover card, and had once shown its ability to be a financial services company and even an insurer! Sears had shifted with historical trends, and surely the company would see that it could bring its resources to the shifting retail landscape in order to remain dominant.
Unfortunately, Sears went a different direction, prefering to focus on defending its current business model. As the chain struggled, it was dropped from the DJIA. Eventually a financier, Edward Lampert, used his takeover of bankrupt KMart (by buying up their bonds) to take over Sears! Under his leadership Sears focused hard on being efficient, controlling costs and managing margins. Extensive financial rigor was applied to Sears to improve the profitability of every line item, dropping poor performers and closing low margin stores. While this initially excited investors, Sears was unable to compete effectively against other retailers that were lower cost, or had better merchandise or service, and the value has declined from about $190/share to $80; a loss of about 60% (at its recent worst the stock fell to almost 30 – or a decline of 84% peak to trough!)
Meanwhile the world’s #1 retailer, Wal-Mart, has long excelled at being the very best at supply chain management, and low-price leadership in retailing. Wal-Mart has never varied from its original business model, and in the retail world it is undoubtedly the very best at doing what it does – buy cheap, sell cheap and run a very tight supply chain from purchase to sale. This excited some investors during the “Great Recession” as customers sought out low prices when fearing about their jobs and future.
But this strategy has not been able to produce much growth, as stores have begun saturating just about everywhere but the inner top 30 cities. And it has been completely unsuccessful outside the USA. As a result, despite its behemoth size, the value of Wal-Mart has really gone nowhere the last 5 years. While there has been price gyration (from $42 low to $62 high) for long-term investors the stock has really gone nowhere – mired mostly around $50.Chart Source: Yahoo Finance
Investors in Amazon have clearly fared much better than Sears or Wal-Mart
Too often business leaders spend too much time thinking about what they do. They think about costs, margins, the “business model” and execution. But success really has less to do with those things than understanding trends, and capitlizing on those trends by shifting. You don’t have to be the lowest cost, or most efficient or even the most passionate. What works a lot better is to go where the trends are favorable, and give customers solutions that align with the trends. And if you do this early, before anyone else, you’ll have a lot of time to figure out how to make money before competitors try to cut your margins!
Recognize that most “execution” is about preserving what happened in the past. Trying to do things better, faster and cheaper. But in a rapidly changing world, new competitors change the basis of competition. Amazon isn’t a better classical bookseller, or retailer. It’s a company that leveraged trends – market shifts – to take advantage of new technologies and new ways of people shopping. First for books and then other things. Later it built on trends toward digitization by augmenting the production of electronic publications, which is destined to change the world of book publishing altogether – and even has impact on the publishing of everything from periodicals to manuals. Amazon is now creating market shifts, which is changing the fortunes of others.
For investors, employees and suppliers you are better off to be with the company that shifts. It has the ability to grow with the trends. And the faster you get out of those companies which are stuck, locked-in to their old business model and practices in an effort to defend historical behaviors, the better off you’ll be. Despite the P/E multiples, or other claims of “value investing,” to succeed you’re a lot better off with the company that’s finding and building on trends than the ones managing costs.
The Amazon versus “big-box” stores comparison seems almost “too obvious”. What I’d like to hear are your thoughts on what seems to be the inevitable Amazon versus Apple battle. I know you like both firms and both are wildly successful; both have well thought-out business strategies…and both seem to be converging on the same content distribution space. What are your thoughts?
Thanks for another great post.
Both Amazon and Apple are showing evidence of vitality and reaping the benefits in growth. Both prove the viability of growth via market disruption. In Apple’s case, this is even clearer, as there is a distinct phase in its history where lock-in seemed to be the order of the day.
I would like to see if insight and the courage to act (intangibles with very tangible consequences) is in any way correlated to future success. It is clear however, that past success is not an indicator of future performance.
At what point does insight and the courage to act represent a competitive advantage for the organization? Can the lack of these, particularly among leaders, become a liability for all stake-holders.
It is interesting to note your call to “investors, shareholders and suppliers”. Lock-in can extend that far, making the efforts to overcome lock-in, even more herculean. This is why I mention insight and courage.
Excellent Comment WrenJ. Good question about the notion of an inflection point – where on one side you are more controlled by history and on the other you are using market inputs to make decision. Certainly Apple crossed over – as did IBM back in the Gerstner days. The challenge is to make this ongoing – like Apple – and not merely a one time event (even though few do it even once!)
Pat, is there an inevitable battle between Amazon and Apple? In some markets, such as eReaders this does seem assured. But in many it is less clear.
Firstly, the tablet and digitally publishing markets are destined to be enormous. In the next few years of rapid growth the competitors (including Google) will likely thrive without a lot of “head-on” competition. Market growth will allow for mutual success.
When the growth slows it will be more interesting to see if the 3 have developed alternative markets so they can move forward with growth initiatives in such a way that they will avoid a gladiator battle between themselves.