Friday, October 05, 2012

Don't try to out innovate Amazon

Amazon is famous for it's two factor market and platforms play. The modus operandi of Amazon in general is :-

1. Find an activity which should be so well understood and ubiquitous that is suitable for provision as a commodity (ideally utility service). Example's would be online marketplace, infrastructure, certain data sets etc.

2. Provide a platform to exploit this.

3. Enable an ecosystem to build on the platform. This should be either an ecosystem of providers and consumers (two factor market) or consumers of an API (e.g. developers building higher order systems).

4. Mine that ecosystem for new information on trends (i.e. things diffusing in the market or through consumption of the API).

5. Commoditize those new trends either through copying or acquisition in order to provide new component services to both feed the ecosystem but encourage it to innovate more.

This model is far from new. The basics are - get other's to Innovate, Leverage the ecosystem to spot trends and Commoditise to component services - ILC for short. It enables the company to appear to be highly innovate, highly customer focused and highly efficient all at the same time and the ability to do all three increases as the ecosystem grows.

So, when you come up against Amazon in your industry, here are two simple Do's and Dont's.

Don't try to out innovate Amazon : You're not actually fighting Amazon over innovation but instead you're fighting the entire ecosystem that has built upon its platform and is doing much of the innovation (in terms of new activities). It's worth remembering that some of Amazon's ecosystems can have hundreds of thousands of developers and companies. If you're going to try this alone then you'll need an enormous R&D group to out compete on these terms. If you've not got this then reality is you'll just get spanked. This is despite, if my sources are correct, of Amazon not having a traditional R&D group. It wouldn't surprise me if every time Amazon hears a company say "We're going to out innovate Amazon" then they cross them of their list of competitors to watch and mark them "RIP". The only time its really worth fighting on these terms is when you have an equivalent size of ecosystem (or you're pretty confident of quickly getting one) combined with the ability to exploit it. In which case you're not really trying to out innovate Amazon, you're focused on getting your ecosystem to out innovate their ecosystem.

Do try to co-opt and out commoditise Amazon : Critical to this game is to try and build a bigger ecosystem and one way is to exploit the main weakness of Amazon being a single provider. So, try and build a competing market of equivalent providers enabling customers to easily switch between its members. Co-opt Amazon's ecosystem as much a possible. Provide the systems as open source and don't fall into the trap of all the members trying to differentiate (the collective prisoner dilemma issue). Once your ecosystem is big enough then you can use the ecosystem to out innovate Amazon and its ecosystem.
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