Why is LeBron James the best basketballer in the world? Because he’s a big man who moves like a small man.
Big guys are strong and slow; small guys are fast and weak. James has the best of both. He’s as strong as a weightlifter and as light as a gymnast.
The same thing applies to companies. Big companies have power and economies of scale; small companies have speed and focus. Big companies dominate the industries where scale matters; small companies dominate where speed and focus matters.
It’s very rare to find a big company which can move fast, and stay focused. Amazon is one of those companies.
Amazon is a 6’8” giant, as light as a dancer.
Crushed by scale
It’s easy to understand why big companies have an edge over small companies. It’s a story as old as capitalism.
Big companies can spread fixed costs over a bigger number of customers. Picture your local independent bookshop and a one million square foot Amazon fulfilment centre, and you have the idea.
But size isn’t everything. After a while, companies get so big that they become impossible to manage. They come to have tens of thousands of workers and fifty layers of managers. Very few of their workers deal with customers.
They get fat. And in the end they get beaten by a quick, focused, lean competitor.
Big and lean
Amazon is obviously huge. But the really clever thing about it – the thing that makes it so formidable – is that it’s figured out a way to stay lean.
Here’s how it’s doing it.
Big companies like Amazon have lots of different functions. They have a department for coding the Amazon website; a department for transporting goods internationally; one for running warehouses; IT; human resources; customer services; finance, and so on.
The problem is, in this setup very few workers actually sell their stuff on a market. The IT or finance department in a big company never sees a customer; it’s just managed by a big bureaucracy. There’s no pressure to get better, and no accountability.
Amazon’s big idea is to turn all its corporate functions into products. That’s because products have customers, and customers demand the best.
IT is the first and best example of this.
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.
Opening the IT department up to outsiders solved three problems at once. One, it gave Amazon more scale, which meant it could spread its fixed IT costs over a larger number of users. Two, it opened up a juicy new revenue stream. And three, it brought customers closer to Amazon’s IT workers. It meant that they had to sell their product on a market. And that put pressure on them to produce the best IT system money can buy.
There are loads more examples of this. Amazon allows outsiders to keep stuff in its warehouses and flog them on its site; it handles customer service for other companies; it’s getting into international cargo; and it’s allowing developers to borrow its voice recognition technology.
In each case, Amazon gets 1. More scale, leading to lower costs, 2. A nice revenue stream, and 3. Pressure on its internal teams to deliver a market-worthy product.
Introducing: The Bank of Amazon
Now having seen all this, what do you make of this headline from Bloomberg last week?
“Amazon supplies funds from its own balance sheet within 24 hours, then deducts loan payments every two weeks automatically from the seller’s account. If the account runs dry, or if sales suddenly dip, Amazon can put a freeze on any merchandise held in its warehouses until the seller pays up.”
And of course there’s no mucking around with credit assessments, since Amazon already knows how much cash these merchants are making every month.
What does Amazon getting out of this? Once again: more scale; more revenue, and pressure on internal teams.
Companies only stop getting bigger when they get too unwieldy to manage. Amazon may be huge, but it’s staying lean, fast and focused.
That’s why I’m still talking about Amazon, weeks later. If you still haven’t taken a chance to learn how to profit from this extraordinary company – what are you waiting for?