What Can Amazon Teach Boards?

By Stephen Vargo

Originally published in Boardmember.com

With the rise of “FANG,” the reigning quartet of Facebook, Amazon, Netflix, and Google, boards are left wondering why and how these disruptive businesses maintain their success.

Essentially, it boils down to disruptive innovation, which at its core is an innovation that creates a new market and value network by displacing an existing one,  replacing or redefining, value propositions, alliances and, often, established market-leading firms.

While many boards attempt to become disruptive businesses by emulating these tech company’s best practices, boards should instead divert their efforts towards an all-encompassing disruptive strategy of their own. As a case study, Amazon has followed several strategic guidelines to maintain its position as a disruptive innovator and, in many ways, threaten the dominance of the other big tech firms

There are three core components of Amazon’s disruptive business strategy that boards should consider:

  1. Always maintain a true customer focus, the relentless focus on what the customer is trying to achieve and how the firm can best assist.
  2. Always innovate: be entrepreneurial, including willing to learn from failure.
  3. Always strive for strategic advantage in relation to the customer, rather than a competitive advantage.

Amazon CEO Jeff Bezos has observed that “A company shouldn’t get addicted to being shiny because shiny doesn’t last.”  His statement underscores the crucial nature of innovation. Best practices don’t stay the same, just like shininess fades without polish. Directors can learn from Amazon by continually looking to extend their businesses’ key competencies into an innovation strategy that is unique and nuanced for their specific business capabilities. Amazon favors constant innovating, and boards should recognize that all innovations will eventually be surpassed. They must realize that there is no such thing as a “sustainable competitive advantage,” due to ongoing and constant innovation.

“TO BECOME DISRUPTIVE, A BOARD MUST UNDERSTAND AND UNPACK THE UMBRELLA TERM OF INNOVATION.”

Adopting a customer focus mentality is key according to Bezos, who describes their approach as a “relentless focus on customer experience.” Companies should utilize a new business model to extend the scope of their competencies to align with customers (or clients’) goals and consumer convenience. They should also focus on increasing the customer experience in the use/value co-creation process, a value co-creation process in which the customer and seller work together to create a value proposition of more benefit to the customer. Implementing these principles will enhance customer loyalty due to a positive customer experience causing customers to “stick”.

To become disruptive, a board must understand and unpack the umbrella term of innovation. There are several types of innovation methods that tie into Amazon’s business strategy. They are:

  • Disruptive: Described by Clayton Christensen as a new approach where businesses initially target the bottom of a market, leading to an eventual displacement of previous high-end approaches.
  • Incremental/sustaining: Referring to gradual improvements in existing value propositions, technology, and processes.
  • Breakthrough Innovation: Meaning sudden changes in “industry“ norms that alter current capabilities, often imported from other industries or functions.

Amazon utilizes all three types of innovation, creating continual disruption. At the base of its business model of innovation is a willingness to change the “rules of the game,” the accepted practices of the current market.

Within the boardroom, disruptive forces have caused confusion for directors. Some develop their own disruptive strategies, based on their own unique competencies, often developed through “skunkwork’ research projects, supplemtented by acquisitions of newer, disruptor companies. However, too often they take defensive approaches by trying to adopt the “best practices,” the tactics of successful disruptors, an approach that is almost always destined to failure.

When innovating, boards should encourage their CEOs to utilize a “fail-fast” philosophy that incorporates extensive testing and development to determine and align their competencies with customer-desired outcomes, through their overall business strategy.

In short, by defining clear principles such as Amazon’s, rather than copying specific practices, an innovative business can be created that focuses on customer experience while redefining, creating and shaping winning strategies.

 

Stephen L. Vargo

Stephen L. Vargo, Ph.D. is a Shidler College of Business Distinguished Professor and Professor of Marketing at the University of Hawai’i at Manoa. He has an MS degree in social psychology and a Ph.D. in marketing