Working Smarter

I recently had the privilege of meeting Professor Sunil Gupta of the Harvard Business School at CitiBank HQ in New York City.

After his lecture, I bought a copy of his latest book, Driving Digital Strategy: A Guide to Reimagining Your Business. This article can’t do justice to the wisdom contained therein and I haven’t had time to carefully read the entire book. Nevertheless, in both his lecture and book he pointed out much of what many of you already know and some you probably didn’t.

Nevertheless, I highly recommend it.

If you follow my advice, many of you will go directly to Amazon whom he discusses at length to buy the book. In the beginning, Professor Gupta asks you to define what business Amazon is in. Founder Jeff Bezos started the company in July 1995 to use the internet to sell books at low prices. What he created was a virtual store with lower fixed costs and a larger inventory than most brick and mortar box stores. Bezos realized that consumers shopping for other goods might appreciate this concept, so he added more stuff.

It began with music, electronics, DVD’s, software - and the beat goes on. He posed a significant threat to traditional retailers like Best Buy, Toys R Us, Walmart, Barnes & Noble and others. Surprisingly, he did not look for large profit margins on the Kindle since he saw it as the razor to sell his blades (books and newspapers).

Five years later, he took on third party products which converted Amazon from an online retailer to an online platform which required Amazon to develop new capabilities of acquiring, managing and training sellers on its sites without losing control or damaging customer experience.

Amazon has adapted to new opportunities and transformed itself quickly. When Apple introduced iTunes in 2001, Amazon introduced its own video on demand service. In 2011, Amazon in partner with Warner Brothers launched Amazon Studios to produce original movie studio content. What was their rationale for what was just an online retailer to move in this direction? Video content helps convert viewers into shoppers. In 2016, Jeff Bezos said, “When we win a Golden Globe Award, it helps us sell more shoes.”

Who knows why Bezos bought Whole Foods or The Washington Post?

Through Amazon Prime, which offers a two-way subscription for a fee, Amazon gets to keep raising Prime prices with next to no resistance on its 75 million Prime users. They just raised the price by 30%. No one blinked.

A premise of the company is to design its business around its customers, not its products or competitors. As an online retailer, Amazon competes with Barnes & Noble, Best Buy and Walmart.

As an online platform, Amazon competes with eBay. In cloud computing, it competes with IBM, Google and Microsoft. In streaming services, it has Netflix and Hulu as formidable competitors. Amazon Studios pits the company against Disney (which is probably why Disney outbid Comcast for 21st Century Fox.

Its entry into mobile phones put it in the crosshairs of Apple, HTC and Samsung. Its ad network made it Google’s rival. By helping to finance its suppliers, it has become a bank.

The company is not bound by traditional boundaries.

According to Forbes magazine, Bezos is coming off a 3-year run which has made him the richest man of all time. They have 575,000 employees worldwide and are looking for a second headquarters. The stock price is up over 270% over the past 3 years. They are going to grow both vertically and horizontally.

How does a company defend against such a dynamo? 

Best Buy came up with a creative solution. According to Professor Gupta, when Hubert Joly joined Best Buy in September of 2012, he faced a number of challenges. Best Buy was the last man standing in the big box electronic appliance category. What Best Buy did was to strengthen its partnership with vendors. They had six hundred million visits to their stores, many of whom looked at the products, saw demonstrations and then bought it from Amazon at a lower price. As a start, Joly eliminated about 1 billion in costs at Best Buy.

These stores were critical for Best Buy’s vendors, such as Samsung, LG Electronics, Hewlett Packard, Sony and others that did not have a national footprint in which to display their products. Best Buy saw a win-win opportunity to showcase their products in Best Buy Stores in order to provide the best customer experience. Best Buy agreed to install 1400 Samsung “shops” within Best Buy, since it was typically not cost effective or strategic for companies like Samsung to open their own stores. This branded store within a store, which employs dedicated Samsung sales staff, helped Samsung very quickly gain visibility and engage directly with customers. In return, Best Buy got fees for showcasing Samsung’s products similar to the fee paid by consumer packaged-goods firms to supermarket retailers.

Following the success of Samsung Experience Shops, as they were called, Best Buy formed or expanded partnerships with many of the world’s foremost tech companies, including Amazon, Apple, Canon, Google, LG, Microsoft, Nikon, Sony, Spirit and Verizon. Each vendor made an investment to fund its store within a store.

Best Buy evolved and augmented its business model to embrace both its strengths and the needs of the company’s vendors.

The new strategy worked. Comparable store sales and operating income improved and total shareholder return during 2012 - 2017 was 642%, placing Best Buy among the top 10% of S&P 500 companies in that time period. Meanwhile, Toys r Us, Circuit City and Radio Shack went bankrupt.

Who says you can’t work smarter?

What do you think?

Ira Friedman