MARKET STRATEGY

Amazon is interesting not just because of its competitive scope, but also because of its market strategy. Michael Porter of Harvard Business School suggested in 1985 that companies need to choose not only whether to have either a broad market/product focus or a narrow one (a niche strategy), but also either a differentiation or cost leadership strategy. Otherwise you confuse both the customer and yourself, and don’t focus capital or revenue cost expenditure in the right way. Other strategists would contend that you can mix the two as a hybrid.

A differentiation strategy is where the product or service is either perceived to be, or is, of superior customer value and has a definite price premium. A cost leadership strategy is where the price may be similar or usually lower than the competition, but costs are certainly lower.

From nearly 25 years of consulting I have found that hybrid strategies are typically hard to bring off. If you do adopt a hybrid strategy, then (a) you need to know where your main focus is, and (b) you need to ensure that you don’t undermine value creation or lower your costs through being inconsistent in your competitive style.

In Amazon’s case, the core strategy is clearly more a cost leadership one when compared with bricks and mortar retailers. Amazon has massive warehousing facilities and processing capability, which give it physical economies of scale. That in turn gives it cost advantages. But in its service it is differentiated - so it is something of a hybrid.

Amazon is ultra-keen on customer feedback, and Bezos has spread customer focus as a mantra throughout the organisation. So when my wife’s year-old Kindle suddenly stopped working and she called Amazon customer service, they immediately agreed to send her another. Delighted customers spread such feedback as I have just done. Such service differentiation doesn’t just bring loyalty but also encourages customers to buy more from Amazon.