Amazon is designed to spin like a flywheel: Brian Dumaine

Brand Amazon or brand Jeff Bezos — which is bigger? Undoubtedly, it’s the man himself. There could be another Amazon; Bezos is still capable of building a second one from the scratch. But it’s highly unlikely the world is going to see another Jeff Bezos. Such is the power and influence the man, his many products and partnerships that we can easily say what Bezos thinks now is what the world will think tomorrow. Whether that’s a great thing or not is a matter of debate. In Bezonomics , Fortune journalist Brian Dumaine says the Amazon founder has introduced a new form of business leadership, which is changing the way we live, work and even think. In an email interaction with BusinessLine, Dumaine talks more about the book and how Amazon is delivering a new world order and business culture among us. Edited excerpts:

So much as happened with Amazon since Brad Stone wrote his excellent book back in 2013. Amazon was not in the cloud computing business, it had not become a video and music streaming powerhouse, Alexa the voice recognition system didn’t exist, it wasn’t building its own shipping company and it was a much smaller company with lesser impact on society and the global economy. I wanted to capture the way Jeff Bezos, now the richest man in the world, was bringing change to the way we do business and the way we live.

Amazon stands out in history because it is the first company to successfully integrate big data, AI and machine learning into the physical world. Other big tech platforms such as Google, Facebook and Microsoft make their money in cyberspace. Bezos, in a sense, is digitising the world of retail, shipping, vehicles with its self-driving delivery vans, and home electronics — with its smart home security and entertainment systems all running on Alexa.

Take, for example, how Amazon ensures that its customers almost always can find what they want and get it delivered when they want it, no matter where they live in the markets that the retailer serves around the world. Before machine learning came along, Amazon conducted weekly retail reviews with as many as 60 managers — similar to Walmart’s famous Saturday-morning meetings. Those who were responsible for the supply and those responsible for demand would sit around a table — some would call in from other regions — and negotiate what to buy, how much to buy, and which warehouses needed what amount.

The company’s computer systems provided lots of useful data about sales trends on which to make their decisions, but it was still human beings making those decisions. Amazon has now taken the most recurring conversations discussed around that table — such as what is the error rate in shipping, what are the shifts in consumer demand, what are the changes in the time to get a product from the factory to the warehouse — and designed machines to make decisions based on those factors. “We were able,” Amazon’s head of global commerce Jeff Wilke told me, “to close the loop so humans no longer have to decide. We place buy orders for millions of items automatically.”

What are the historic and economic factors that have gone in favour of Bezos and Amazon, something others missed?

One of the most important historic events that helped Amazon become what it is today was the advent of Moore’s Law, which posits that computer processing power and speed doubles every two years. Over the past couple of decades, computing power has become so cheap that crunching the mountains of data necessary for machine learning and forms of AI such as voice and facial recognition became more affordable. Amazon would not have been able to collect and swiftly manipulate information on its hundreds of millions of customers around the world without Moore’s Law. Without cheap computing, Amazon would not be able to deliver most of the 600 million different products it offers to its customers in two days or less. That’s a game-changer.

Also, Amazon, which was founded in 1995, was early to the e-commerce market which has given it a first-mover advantage. The company now controls 38 per cent of the e-commerce market in the US and about a quarter of the market in Europe. That’s a hard barrier to overcome for competitors.

I think the leader who best matches up to Jeff Bezos is Apple’s Steve Jobs, in the sense that they both are master innovators. Both Jobs and Bezos had that rare knack that allowed them to figure out what customers want, even though most don’t even know it. What customer focus group would have come up with the idea for an iPod or an iPhone? Jobs knew that digital portability would be popular and made huge bets on those technologies. Bezos did the same with the Prime membership programme, Kindle and Alexa.

He designed Amazon to spin like a flywheel — a term Amazonians use religiously. Less a formula and more a high-tech perpetual motion machine for growth, the “flywheel” paradigm is deeply embedded in Amazon’s culture. Picture a three-tonne stone wheel resting on a suspended axel. Getting it moving is tough. The trick is to apply enough energy day in and day out to get the flywheel spinning faster and faster until it keeps moving on its own. When Amazon offers perks to its Prime members such as free one- or two-day shipping, free Amazon TV shows, or a discount at Whole Foods, it brings more customers to its site.

More customers attract more third-party sellers to Amazon.com because they want to reach this large pool of potential customers. (Today, independent, third-party sellers account for more than half all the products sold on Amazon. The company sells the rest directly to consumers.) Attracting more sellers increases Amazon’s revenues and creates more economies of scale that allow it to lower prices on its site and offer more benefits. That attracts more customers to Amazon.com, and that brings more sellers, and the flywheel keeps turning faster and faster and faster.

But Amazon’s flywheel has now evolved into an even more formidable machine. What Bezos has done is taken the flywheel concept to a new level, a move that is revolutionising the way we do business and one that has given the company an almost insurmountable competitive advantage over its rivals. He has created the next-generation corporation, the 21st century model for how the world will do business. Bezos is now accelerating his flywheel through the shrewd use of AI, machine learning, and big data. The company has gotten so good at applying computer technology that it has started to learn and get smarter on its own. No corporation has ever done this as successfully as Amazon. A lot of CEOs pay lip service to AI and hire a handful of data scientists in an effort to tack this technology onto their business model. At Amazon, technology is the key driver to everything it does. Consider that for the development and upgrading of its magic genie Alexa, which runs on AI voice software, the company as of 2019 had tasked 10,000 employees, the lion’s share of data scientists, engineers and programmers.

Amazon has been accused of using its online might to crush the small businesses that sellers that operate on its site. The US Congress and the EU are investigating Amazon’s alleged anti-competitive practices. The concern is that the company is using sales data from those third-party sellers to create their own Amazon-branded products and then they harm those sellers by offering a similar product more cheaply. Some regulators want to separate Amazon’s retail business from its online platform to stop this abuse. Amazon counters by saying that they can’t be harming their third-party sellers because they are now the fastest-growing segment and Amazon.com, accounting for 58 per cent of all sales.

Today’s shoppers want not only fast delivery but also the option either to buy online or browse in a real store. With its $13.7-billion acquisition of Whole Foods in 2017, Amazon is in a position to become a leader in a new hybrid form of retailing that promises to disrupt traditional brick-and-mortar retail. Whole Foods’ 500-plus stores give Amazon’s customers the choice of ordering groceries online and having them delivered to the home; ordering online and having them put in their trunk on the way home from work; or going into the store itself. That’s hybrid retailing and it’s the future.

Now, Amazon is building a national chain of lower-cost grocery stores in the US to compete more directly with Walmart and Kroger. One expert suggested that Amazon converts abandoned Sears locations into their new grocery stores. The company is also striving to operate on a smaller scale, too. As of 2019, Amazon operated 42 of its own physical retail stores, including Amazon Go, Amazon 4-star, and Amazon Books. So far, Amazon has opened only 15 Go stores, where shoppers can buy sandwiches, salads, and drinks without checking out. Ceiling cameras scan purchases and charge them directly to the shoppers’ Amazon account. Weights in the shelves determine whether the person has returned the item. The stores have proved popular, and the company says it will keep rolling them out. Wall Street analysts predict that the Go Stores will be a multi-billion business by the middle of this decade.

Amazon continues to build AWS, its cloud computing business, and its online advertising business. And that’s just the beginning of the disruption Bezos is causing. The company is moving into finance, healthcare, and shipping. When Bezos applies his AI flywheel to these industries, many competitors are likely to be ground into dust or at best lose significant market share.

Yes, this is possible. In Chapter 12 of my book Bezonomics , I detail how small businesses, whether in India or elsewhere, can outflank Amazon. If a company can’t match Amazon’s vast assortment of products, low prices and speedy delivery, it must differentiate itself in other ways. It needs to pursue strategies that Amazon would be hard put to match. The common thread? The retailers of the future will focus their efforts in four major areas: creating an amazing in-store experience that digitally merges with an amazing online one; offering a highly curated selection of exclusive products; investing heavily in technology, including mastering social media; and doubling down on a social mission in a way that makes customers feel good about buying from them.

The company has been slow on the social and environment front, mainly because Bezos built Amazon by focussing all its energy and resources on the customer. On the environment, the company’s billions of deliveries and its energy-sucking server farms aren’t helping the world’s greenhouse gas emissions. Its warehouse workers have to do physically stressful repetitive work. On top of all that, in 2017 and 2018, the Wall Street Journal estimated that Amazon legally paid little or no US federal income—a fact that’s hard to swallow given that the company posted $10 billion in annual profits in 2018 alone. The company now realises that is can’t ignore its social conscience and it has started to change by paying its warehouse workers more and by pledging to a zero-carbon footprint.

The company’s culture is fast-paced, aggressive and largely unforgiving for both white and blue-collar workers alike. Amazon employs hundreds of thousands in its vast global warehouse network, and these jobs are hard, demeaning, and non-union. Amazon is trying to change this. This spring, Bezos announced that the company will spend $4 billion trying to make its warehouses safer for workers during the pandemic. As bad as are the working conditions in its warehouses, those workers have to worry that they’ll in the next few years be replaced by robots who can do their tasks more quickly and cheaply. And that day is coming sooner than most think.

Yes, I will add a chapter for the paperback edition that comes out next spring and have already written a new Covid-19 related preface for the Japanese edition that comes out this summer.

Momentum.

I’m looking for the next Jeff Bezos to write about.

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