June 22, 2017

Amazon and the limits of growth: The Red Queen effect confirmed

Headlines like this dominated the online and offline media last week: The recent takeover of Whole Foods for almost $ 14 billion by Amazon sent shock waves to observers and high street retailers.
Should we be surprised by the news? Personally I am not surprised at all; Diversification and continuous expansion is a strategy that Amazon consistently pursuits since the beginning of its times.

Is that right? In 2004 I published a research paper in the Management Decision titled: "Strategies for surviving the Internet meltdown: The case of two Internet incumbents" * Although this article won the title of the best paper award of the journal for that year it never became so popular with only 24 citations so far.
In this study I reviewed the strategic decisions made by Amazon and one more of the survivors of the dot.com disaster (E-Trade) at the beginning of the 21st Century, looking for clues why these Internet pioneers did not follow the fate of the thousands of dot.coms that went bankrupt after the 90's dot.com hype.
My study was focused on the major and minor strategic decisions made in the period 1997 - 2001. I classified these decisions according to the well- known Growth Matrix of Ansoff; this matrix identifies as most of us know, four types of growth strategies: Market Penetration, Market Development, Product Development and Diversification.
During the period in question Diversification was the main strategic approach for growth pursued by Amazon: Although Diversification is the most risky of the four options this strategy worked and not only helped Amazon survive the Internet debacle but also transformed Amazon from an online bookstore to an online (and increasingly traditional) retail giant that it is today. We must not forget that Whole Foods is not the first traditional retail venture of Amazon, they operate already a number of physical bookstores; interestingly books is the first product category that help Amazon to be launched as e-shop back in 1995.

As I mentioned, to me the expansion of Amazon to traditional retailing did not come as a surprise. In my 2004 article I came to the following conclusion when discussing the findings:

"An alternative strategic option for both Ž firms (i.e. Amazon and E-Trade) could be to concentrate on the present business domains and pursue further grow by expanding their physical activities rather than the virtual ones, at the cost of traditional players; such a strategy is likely to trigger reactions of traditional, physical Ž firms."

This conclusion was based on the findings that in the case of Amazon (and to a lesser degree of E-Trade) their strategy was looking to be inspired by the Red Queen Effect. My impression was that when Amazon will sell online whatever is possible to sell it might turn to the traditional retailing  in order to maintain its survival and growth.

The interesting thing about the emerging high-street presence of Amazon (and for sure more e-businesses will follow it) is that it can have many negative effects for established retailers but it could have also some positive ones: Is the expansion of e-tailers to the High Street a way to revitalize city centers suffering from shop closures and increasing difficulty to attract buyers in shopping centers?

Interesting issue to follow-up. One thing is sure, the distance between online and off-line becomes once more a bit smaller.

*Efthymios Constantinides, (2004) "Strategies for surviving the Internet meltdown: The case of two Internet incumbents", Management Decision, Vol. 42 Issue: 1, pp.89-107, https://doi.org/10.1108/00251740410510190