Amazon has clearly become an absolute juggernaut. There are likely only a handful of companies today that have the resource and scale to compete with Amazon directly. But most of the companies that do have the resources to compete generally don’t operate ecommerce platforms, leaving the field mostly wide open for Amazon to continue to grow unabated.
I have been trying to grapple with the question of why it has been and continues to be so hard to compete against Amazon. Yes, Amazon has incredible scale, enormous cash flows, excellent assets (e.g. Fulfillment advantages as detailed in my post, Supply Side Advantages of Fulfillment (by Amazon)), but Amazon didn’t always have these advantages. And many of the competitors that Amazon has bested had either similar or even greater advantages in the early days.
For example – scale. A decade ago, Amazon was a tiny minnow compared to the Goliaths of brick and mortar retail. Even today, Amazon is still smaller than Walmart. Scale alone is not what made it hard to compete against Amazon, though it is what makes it even harder to compete against Amazon today.
Same with cash flows. Amazon may have more cash than it knows what to do with today, but its cash flows were materially weaker a decade ago. And certainly the incumbents like Walmart would have been much better positioned from a cash flow perspective to pursue Amazon’s strategy than Amazon was.
The easy explanation would be mismanagement at peers, but that seems like an incomplete explanation to me. After all, EBay wasn’t exactly poorly managed and had an internet lineage just like Amazon. EBay even had greater reach to boot, yet is now mostly an afterthought.
All of these advantages played a part…and ultimately Amazon’s differentiated strategy and perspective on retail helped them pull away, but I believe that one of the biggest reasons why competitors failed and continue to fail against Amazon is because they are never actually competing against Amazon but rather against Amazon’s past.
At any given moment, the observable parts of any company is a summation of decisions – strategic and financial – made some time ago. For most companies, the gap between those decisions and what you see is probably not large because many companies are unfortunately run to a fairly short term time horizon. However, for a company like Amazon, the gap is massive, especially since Jeff Bezos prides himself on thinking 5-10 years out.
From the perspective of a company like Walmart or Macy’s, they likely see Amazon as a large ecommerce platform with wide selection, fast delivery, and a sticky Prime loyalty program. But what they believe they are competing against (and observe) is nothing more than Amazon’s past! And likely the version of Amazon as it was strategically decided 5-10 years ago. Consider that Amazon launched Prime in the US in 2005. Amazon’s competitors are still struggling to compete against Prime with a competitive offering today, but Prime was likely decided far in advance of 2005. Even if competitors were to catch up, they would only be catching up to the Amazon of yore. The Amazon that exists today, the Amazon for which today’s strategic decisions affect, is the true juggernaut that competitors need to beat, but they won’t even know what they are truly up against until it becomes obvious a few years from now.
I think this is the key reason why Amazon is such a formidable competitor, and it is all enabled by years of advance planning. Competitors have a hard time catching up because by the time they know what they are up against, they are already years behind. Even formidable competitors like Google and Microsoft have been blind-sided by AWS, so it’s not just retail where Amazon successfully employs such a strategy.
In order for any company to successfully compete against Amazon would likely require recognizing this asymmetric form of competition and taking a leap of faith to position competitively against the Amazon of the future as opposed to the Amazon of the past. What does the Amazon 5 years from now look like? That’s the true measure of competition.