Content Guy's Note: The goal of "The Innovation Conversation" is to explore some facet of the fast-changing, technology-driven retail landscape and how it affects businesses and consumers. It is, we think, fertile territory ... and one that Tom Furphy - a former Amazon executive, the originator of Amazon Fresh, and currently CEO and Managing Director of Consumer Equity Partners (CEP), a venture capital and venture development firm in Seattle, WA, that works with many top retailers and manufacturers - is uniquely positioned to address.

This week's topic: “The Four: The Hidden DNA of Amazon, Apple, Facebook, and Google,” a new book by Scott Galloway.

And now, the Conversation continues…


KC: This week’s column will focus on a new book by Scott Galloway, “The Four: The Hidden DNA of Amazon, Apple, Facebook, and Google,” in which he analyzes and dissects four technology giants that he says “have inspired more joy, connections, prosperity and discovery than any other entity in history,” but also may be the Four Horsemen of the Apocalypse, wielding enormous and unprecedented power and influence while ingratiating themselves into every facet of our lives.  Those companies are Amazon, Apple, Facebook and Google.  For the purposes of today’s column, we’re just going to focus on his view of Amazon, and we’ll get to the other three in future columns.

So, Tom … One of the most interesting parts of Galloway’s Amazon analysis is the notion that because Jeff Bezos simply does not return profits to investors, it gives him enormous sums of capital with which to play and innovate … an advantage that virtually no other retailer has.  We talk a lot here about the importance of speed, the value of embracing failures, the importance of having a customer-first strategy, and the advantage of taking a holistic approach to the business rather than thinking and acting in silos.  But when you come right down to it, it is all the investment capital that Amazon has that is the fuel that drives all these engines.  One of the questions I get a lot is, how can or should the competition - shackled to more traditional metrics - compete?  Galloway’s answer is that they need to do it by investing in human capital, with what he terms “a deft investment in technology.”  That strikes me as accurate, if maybe a little glib … what do you think?

Tom Furphy:
Way back in his 1997 Letter to Shareholders, Jeff laid out the company’s approach to investment. The main message was that the company was going to focus on the customer, innovate relentlessly on their behalf, use profits to fuel further innovation and develop market-leading positions across the business. This was not to be a short term tactic, but a long term strategy. So much so that the company still attaches a copy of the 1997 Shareholder Letter to its current letter every year to remind investors of the strategy.

Because this is engrained in the culture as the way Amazon does things, and innovation is a key metric for teams throughout the organization, they have become very good at it. The amount of innovation and speed at which they execute is unmatchable. Wall Street is rewarding Amazon for delivering on their growth promise and likely will continue to do so for some time.

I agree with Galloway that incumbent retailers need to leverage their greatest existing assets along with smart investments in technology in order to compete. I view these most important assets as (in no particular order) people, locations, existing market share, shopper trust and vendor relationships. We work across our portfolio to help retailers and manufacturers deftly introduce technology to get the most out of these assets and, more importantly, deliver a better shopping experience. Ultimately, these are shopping experiences that can stand up to competition from Amazon.

Although most companies are acting too slowly, several are forging ahead with these investments. We see brands starting to add more digital capabilities and developing more direct shopper relationships, we see retailers and brands jointly working on shopping automation at Replenium and we see employees empowered with great service technology, such as our BevyUp technology powering Nordstrom stylists and underpinning the new Nordstrom Local concept. None of these required significant investment levels. They simply required conviction to experiment.

KC: Galloway clearly has a somewhat jaundiced view of Amazon - that while it is celebrated as a paragon of innovation, it also can accurately be described as a tax-avoiding job-killer.  (I’m simplifying a bit, but I think it boils down his essential attitude.)  I’m not sure he’s entirely wrong on this, though I would suggest that every person and business pays as little tax as possible, and that circumstances just allowed Amazon to be better at it than most of its tradition-bound competition; while I think that the job-killing accusation has validity, the same can be said of many innovative and disruptive companies throughout history.   But to me, one of the more interesting observations he makes about Amazon is that “history favors the bold,” while “compensation favors the meek” … meaning that most CEOs actually have been financially rewarded for not being aggressive and innovative. That’s not in the DNA at Amazon.  You’ve been inside the belly of the beast …. what are your thoughts about his analysis?

TF:
Traditional business metrics kill innovation. When leadership is charged foremost with driving near-term profitability, they naturally focus on the meek activities that drive that. Things like cutting costs, driving efficiency, expanding methodically based on a multi-year plan and managing margin all can drive small short term improvements to the bottom line. When this happens, executives get their bonuses and keep their jobs. This works for a while, but over time the companies’ top line softens, they lose market share and profits suffer. And then the executives take an early retirement package.

Conversely, Amazon is all about being bold, experimenting and making several bets across the business. Throughout history, industry leading companies that stopped innovating, that became incremental, that focused on compensation, have all died. Amazon is betting their long-term viability on their continued innovation. Given how relentlessly Amazon focuses on this and how engrained it is in their culture and measurements, I think they stand a great chance of thriving for a long, long time.

KC: From your perspective, can you explain something to me?  Galloway believes that Amazon’s approach of acquiring bricks-and-mortar stores to “complement” its e-commerce business is more effective than “bolting on” an e-commerce operation to an existing bricks-and-mortar infrastructure.  Why is that?  Is it just a matter of legacy issues?  Or is there something deeper going on?

TF: Amazon has spent the past two-plus decades building out an expansive e-commerce ecosystem. That starts with providing great digital capabilities to shoppers and delivering on a core promise of wide selection, great prices and fast delivery. As shoppers browse and buy more, Amazon learns a lot about them and builds massive databases about shoppers and preferences. They use this data to better serve shoppers. It creates a flywheel effect that is undeniable.

All the while, they keep adding new capabilities, expanding their fulfillment network and further delivering on their promises. This creates enormous market share and fierce customer loyalty.

Through the years, Amazon has learned that there are certain elements of shopping that benefit from on the ground, in market, physical presence. To bring these elements to their shoppers, they have experimented with pick-up points, a number of store formats, the Go technology and now have purchased Whole Foods. They will use all of these touchpoints to deliver a more complete shopping experience and will continue to innovate in these formats for their customers.

Incumbent retailers don’t have the advantage of these years of ecosystem development. The best they can do is build up e-commerce capabilities and layer them into their existing store-based model. That is difficult for sure. Especially because you are adding new costs to an already highly efficient and low-profit model. And this is a model that is supported by legacy systems, measurements and cultures. However, innovation is imperative for these incumbents. And it needs to be done by leveraging existing assets with a deft investment in technology.

KC: I love Galloway’s notion that Amazon’s core competence is storytelling, developing a narrative and vision that appeals to both shareholders (at least, those interested in the long-term) and customers.  I think that this is absolutely true, and that most mainstream retailers don’t have this.  Dorothy Lane Markets and Stew Leonard’s do, for example, but most retailers don’t, and are so busy putting out fires and making this week’s numbers that they don’t even think about it, much less engage in the process.  Do you agree with Galloway’s conclusion … and how would you advise companies with which you work to go about hand-crafting their stories?

TFL:
I think my shareholder letter references above are great examples of Amazon’s story telling. Other retailers need to start talking to Wall Street in similar fashion. I realize that stock prices tend to drop when companies state that earnings will be down for some time. But haven’t retailer stocks already taken most of that hit?

To me, a retailer that articulates and executes an ecommerce strategy, especially one that embraces their store base and employees, is a much better bet than one that keeps plodding along, holding on to as many legacy profits as possible. This will hurt short term for sure. The seas will be rough for a while regardless as the market shifts develop. But retailers that invest smartly through this should be rewarded with growing customer loyalty, increased market share and ultimately higher profits.

”The Four: The Hidden DNA of Amazon, Apple, Facebook, and Google,” can be purchased in bookstores everywhere, and, of course, on Amazon.

The Conversation will continue in two weeks, with the first “Innovation Conversation” podcast…