Amazon.com is a very interesting company to study growth strategies. First, the company specialized in online book selling. When it started to expand into new categories such as electronics or home improvements, many questioned the strategy because it was going against some basic principles of marketing. Branding is about focusing your products and owning keywords in the mind of the customer. Products expansions under the same brand name (Amazon) actually hurts a company's ability to stay top of mind with customers for specific categories. The more specialized you are the more likely you are to be number one in people's minds. However, Amazon successfully expanded into a lot of different product categories with the same name. Not only did they expanded into new consumer product categories, but also expanded into business to business applications such as web hosting and e-commerce technology turnkey solutions - all under the same brand name.
There are three specific factors to consider when looking at growth opportunities beyond your core. First, is the growth opportunity building on your core? This seems to be obvious but research shows that managers make a lot of wrong assumptions about the true relationship between the new growth opportunity and the initial core business. They think that there is a match when there is not. According to Chris Zook in his book “beyond the core”, to assess the distance from the core, look at:
- Customers (are customers the same?)
- Competitors (or competitors the same?)
- Cost structure (is the infrastructure the same?)
- Channels of distribution
- Singular Ability: is there a singular asset, technology or brand that gives the core business its uniqueness that is relevant to the new opportunity?
Research shows that the odds of success declined very quickly as a business opportunity moved away from the core business, based on these five dimensions above.
When evaluating these five dimensions, managers can realize that growth opportunities are typically not as close to the core as they thought. In the case of Amazon category expansions, customers and competitors were often different. One could have very reasonably argued that these growth opportunities were too far away from the core for Amazon.
However, the cost structure and the singular capability where the same. Amazon had very specific assets and technologies that gave the core business its uniqueness and were very relevant to the new growth opportunity.
A second very important factor to consider is the size of the profit pool. The profit pool evaluation represents an industry potential profit dollars. Some industries, like the airline industry, have decades long histories of not earning their cost of capital. Some industries simply go down or do not deliver the profits that people hoped for. Amazon.com expanded into growing, profitable markets: e-commerce and web technologies.
The third factor to consider is the company's potential for leadership. If you do not have the potential to achieve economics equivalent to the leader, you may be constantly out invested and out competed. According to Bain, a consulting firm, “the difference in a relative market share of 1.0 to 1.6 is worth 3 to 6 percent additional return on investment a huge difference in a competitive battle”. Yet, the consulting firm found that many weak performing company allowed themselves to be lured to investments in clear follower positions without leadership economics. It is likely that Amazon.com has succeeded into new markets because it was the undisputed leader in E-commerce, was focused on long-term vs short-term, and was able to invest significantly into these new markets to achieve leadership economics.
