Amazon’s secret weapon? Inertia
How the tech giant uses “flywheels” to keep ahead of the competition
Newton’s first law of motion states that an object in motion tends to stay in motion unless acted upon by an outside force.
Companies like Apple rely on reality distortion fields, but Amazon’s success is firmly rooted in physics. Let’s start by clarifying one thing. Amazon is a process company, not a product company. This makes it incredibly difficult to pinpoint which industry they’re in. Are they a retailer, a technology company, or a logistics firm? The answer is all of the above, and more.
At its core, Amazon is a well oiled machine that creates value by being obsessed with customer experience. And the best way to understand their strategy is through the flywheel, a simple mechanical concept that dates back to 6,000 BC.
The flywheel is a piece of machinery that takes a lot of energy to get started, but once it’s moving it tends to keep moving. Sound familiar? According to a 2019 New Yorker article, aptly titled “Is Amazon Unstoppable?”, the notion of the flywheel is venerated at Amazon.
Here’s what the flywheel looks like in action:
Amazon decides to launch a streaming device -> it collects data on the most popular content -> it uses that data to start making its own content -> it offers that content for free to Prime members -> more people sign up for Prime -> Amazon uses that larger customer base as leverage to negotiate lower shipping costs -> Amazon lowers prices while increasing profits with each item purchased.
Customers win. Amazon wins. And on and on the flywheel spins.
No other tech giant has been as successful as Amazon in so many unrelated fields, which reinforces the idea that Amazon is a process company. They look for areas of opportunity where they can throw their considerable resources at spinning up another flywheel. This is where the first of Amazon’s competitive advantages comes into play, which is patient capital.
As Scott Galloway describes in his book The Four, Amazon’s board doesn’t ask how to get the most for the least, but rather “What can we do that gives us an advantage that’s hugely expensive, and that no one else can afford?” I question how sustainable this is, but as long as these big bets continue to pay off Amazon should be able to convince shareholders that patience is a virtue.
Amazon’s second competitive advantage is its culture, which emphasizes a “Day One mindset”. The company is geared around questioning the status quo, embracing risk, and failing fast. Bezos wants leaders to treat every morning as if it’s Day One of the business. As he writes in a 2017 letter to shareholders, “Day Two is stasis, followed by irrelevance. Followed by excruciating, painful decline. Followed by death. And that is why it is always Day One.”
I can’t help but wonder if Amazon’s culture will change now that Bezos is stepping down as CEO. I read the appointment of Jassy as a signal that Amazon’s days of pretending to be a startup are over. The grown ups are stepping in and they are going to double down on the most profitable areas of the business like AWS, while letting some of those other spinning plates fall. As a prime customer, all I can say is they better not get rid of my free 2 day shipping.
Given the multidimensional nature of Amazon’s offerings, it’s difficult to single out a key competitor. On the retail front there’s obviously WalMart and Alibaba, both of which are trying to beat Amazon at its own game in a race to the bottom for prices. I doubt either will win.
WalMart still hasn’t figured out ecommerce and their capital is tied up in brick and mortar stores. Alibaba may dominate the Chinese market, but will have a hard time convincing Americans to ditch the Prime life. In fact, the Chinese giant largely gave up on competing for the US consumer market, instead focusing on attracting US businesses who want to sell their goods abroad.
So if not WalMart or Alibaba, then who can compete with Amazon in the retail space? The answer is local specialized shops. The type of place that curates a selection of artisanal products. The type of shop that is a pleasure to visit, not a chore. Where price is not the key motivating factor behind purchasing decisions.
What I’m describing with Amazon on one end and a local cheese shop on the other has been referred to as a “barbell economy”. Amazon’s flywheel is so powerful that it hollowed out the retail landscape. Individual artisanal shops may come and go, but I don’t see this type of retail experience disappearing entirely. These shops sit outside of Amazon’s flywheel. They’re not gumming up the works or adding any real friction, and so they are allowed to exist, at least for now.
