How Amazon plans to double in size, and double again

Big companies have a cancer in them, and it can kill them if they don’t catch it in time.

In the 1980s General Motors was by far the biggest car company in the world – and its workers were running wild.

Here’s how Jeffrey Liker, a professor of industrial engineering, described a GM factory floor:

“One of the expressions was, you can buy anything you want in the GM plant in Fremont. If you want sex, if you want drugs, if you want alcohol, it’s there. During breaks, during lunchtime, if you want to gamble illegally – any illegal activity was available for the asking within that plant.”

That’s what can happen at big companies – they get too big to manage. Big companies have a cancer in them, and it can kill them if they don’t catch it in time.

Size kills

It’s easy to see how companies get bigger: bigger companies have lower costs per product sold. It’s cheaper to run one huge car factory (or internet shopping warehouse) than lots of small ones.

But size comes at a cost…

In very big companies, most employees are miles away from the customer. They don’t work on the product directly. So the workers who build the IT systems, or design the machines for the assembly lines, or manage human resources, don’t have to think about the company’s customers on a daily basis.

That’s a cancer, because “closeness to customers” is what keeps workers sharp. Customers give instant feedback. They reward workers who are performing and they highlight workers who aren’t.

The alternative to getting feedback from customers is getting feedback from a giant bureaucracy. That’s a hard thing to get right. Worst case scenario you end up with GM’s Fremont plant in the 1980s, followed by GM’s bankruptcy in 2008.

Turning functions into products

Amazon’s huge and it’s growing. How’s it going to avoid GM’s fate?

Jeff Bezos has a solution. If the problem with big companies is that workers are too far from the customer… then he’s bringing the customers closer to the workers.

To make its main e-commerce business work, Amazon has a lot of different jobs to do. It has a huge IT infrastructure, lots of warehouses, and it ships things across oceans. Bezos’s solution is to turn all those different internal functions into products for customers. Turning functions into products brings customers closer to workers.

It started with IT. In the early 2000s Amazon was growing like mad, so it needed to spend a lot of money building out new servers and general IT infrastructure.

Instead of building a system that was tailor-made for amazon.com the online bookstore, Bezos asked his engineers to build a general purpose system that could be used by any company, big or small. He didn’t ask them to build a specific IT system; he asked them to build the building blocks of an IT system. Then, when it was finished he opened it up and invited customers to use it.

He basically turned Amazon’s IT department into a separate company, whose first and best customer happened to be amazon.com. That was the start of Amazon Web Services, a business which brought in £10bn in revenue last year.

Next up was fulfilment. In 2000, Amazon invited companies to sell their stuff on the Amazon site. Vendors could list their stuff right next to Amazon’s on the site, store it in Amazon’s warehouses, and deliver it via Amazon’s fulfilment system.

Amazon’s middle managers were furious. As one exec put it, “Imagine you’re the guy on the hook for a zillion dollars’ worth of inventory, and this other lunatic comes over putting low-cost crap on your page.”

Pissed-off employees aside, the strategy worked for two reasons. First, it gave Amazon even more volume, which allowed it to build bigger more efficient warehouses. And second, it turned fulfilment into a product, with actual customers (ie the vendors whose stuff was being shipped). Warehouses now had customers of their own, who’d leave if they weren’t getting the best service. Amazon warehouses basically became a separate company, whose first and best customer happened to be amazon.com.

International cargo is next. Soon enough, Amazon will be competing directly with UPS and Fedex for international shipping. Its cargo division already has a fleet of 40 planes. And its first customer is, of course, amazon.com.

I’ve seen this strategy working with my own eyes. My employer, Agora Financial UK, is part of the Agora Network of companies. It’s called a network of companies because in the late 1990s, the top brass decided to split the company up and run it Amazon-style.

Agora businesses compete with each other for customers and steal each other’s talent. But the upside is that Agora businesses are small and focused and close to their customers. If they can deliver what their customers want they survive, if they don’t they die off.

A problem, solved

Sure, this approach pisses off employees and cannibalizes some existing businesses. And sure, Amazon’s ecommerce business would surely be making more money if it wasn’t inviting competitors into its warehouses.

But the benefits more than make up for it. Amazon gets a cut of other companies’ revenues. It gets more scale. And most importantly, it brings customers right into the middle of its organisation, which keeps the company lean and focused.

Big companies are supposed to hit a wall eventually, where their size makes them impossible to manage. Amazon looks to have solved that problem.

So, does that mean you should rush out and plonk £750 on a single Amazon share?

Nope!

I’ve found a better way to play this, for potentially far bigger returns.

I’ll be in touch tomorrow morning at 9.30am with the full details. Keep an eye on your inbox.





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