Succeeding in the Digital Economy - a study of Amazon's Business Model Diversification

A study of online retail giant Amazon's diversified business model portfolio provides further understanding of how innovative digital companies gain competitive advantage over more conventionally focused rivals, with two findings gaining additional relevance during the current COVID-19 crisis.

With the rise of the digital economy in recent years, companies such as Google, Facebook, Uber, Apple, Spotify, Airbnb, eBay, and Netflix have flourished across a range of industries, often against powerful incumbents, by leveraging effective and complex relationships with the customer. One way in which such companies have obtained a competitive advantage is by running multiple paths to engaging with their customers at the same time—which is also termed “business model diversification.” In a relatively short period of time, all of these companies and the ways in which they operate have become familiar to large sections of the consumer population.

Amazon is one of the most successful companies to emerge in this transformed business landscape. New research co-written by academics from Cass Business School looks at how Amazon's diverse business model portfolio has enabled it to exploit demand-side customer complementarities to gain significant competitive advantage.

The researchers developed a qualitative longitudinal analysis of Amazon, investigating the various business models adopted by the company during the period between its inception in 1995 to 2018. This study contributes to the growing conversation on business model diversification which to date has almost exclusively considered a supply-side perspective focused solely on a firm's resources and capabilities synergies. It offers a deeper understanding of the synergic advantages arising for the different customer groups that interact with the organisation.

By looking at Amazon’s business model portfolio, scholars propose two types of complementarities which possess the potential to increase returns of joint consumption: ‘one-stop shop effects’ (OE) and ‘network effects’ (NE).

One-stop shop effects occur when one customer group enjoys advantages derived from engaging with multiple consumption experiences in the same place - be this physical (a shopping centre, for example) or virtual (a website or an app). Network effects instead relate to the advantages that may be present for a customer group when another customer group increasingly engages with one of the business models in the portfolio - in the physical space (e.g., newspaper readers and advertisers) or in the virtual space (online marketplace retailers and buyers).

Once Amazon's business models and customer groups were identified, mapping OE and NE between customer groups within and between business models allowed for a full picture of its portfolio of business models. Observing where customer complementarities cluster points the way to what the authors call the ‘integrative business model'.

The integrative business model endows the firm with a superior ability to generate NE and OE, as consumers may perceive additional advantages from engaging with it. Customer groups that interact with an integrative business model can benefit from the greatest number of NE and OE complementarities. This leads to enhanced consumption experiences and better customisation. For Amazon, Prime plays the role of the integrative business model, as it bundles multiple services (free shipping, video streaming, etc) which drive superior customer engagement across the entire business model portfolio.

There are benefits for the firm too. An integrative business model helps to reinforce its bottom-line, create important synergies, and promote cross-selling across business models and product categories in the portfolio - even in those situations (as is the case with Prime) when it is not profitable in itself. In contrast, a standard business model is focused on increasing consumption within business and product categories.

Managing an integrative business model and portfolio can be costly for the firm. Revenues generated from cross-selling may need to be reinvested to subsidise the model. Nonetheless, it can be considered a cornerstone for a firm's diversification strategy through customer complementarities i.e. - by generating NEs and OEs. Furthermore, an integrative business model reinforces and sustains a firm's competitive advantage, as the complex set of synergies and linkages across the business models within the portfolio make imitation by competitors difficult.

While the OE and NE effects can be in place for online as well as offline stores, it is during the complete absence of bricks-and-mortar shops that customers flock to online shops offering superior customer experience online (and superior OE and NE for the customer) - hence why Amazon may be better placed during a period of lockdown, such as the current COVID-19 crisis, than other online retailers.

Good shopkeepers know their customer well and serve them accordingly; yet in times of a health crisis, online retailers have to fulfil the same needs. Online services such as Amazon might be able to use consumer data to guide new and old consumption experiences. Of course, such players need to use sensitive information judiciously and in the interest of the customer to create value while reinforcing its bottom line. This is a challenge for privacy, surveillance, and data governance but management research stands at the beginning of discovering good practice and advising for solid policies, particularly in the time of the COVID-19 Pandemic.

The research paper Customer Complementarity In The Digital Space: Exploring Amazon’s Business Model Diversification can be requested at City Research Online. It was been published in Long Range Planning.