business

Amazon's Provocative New Chapter

In 1999, a division of HarperCollins published Peter Drucker’s Management Challenges for the 21st Century. Soon after, the very first order for the book was placed through Amazon.com (AMZN), then just a few years old.

The author took careful note. “Anyone who 20 years ago predicted the business of amazon.com and barnesandnoble.com—that is, that books would be sold on the Internet but delivered in their heavy, printed form—would have been laughed off the podium,” Drucker remarked.

Clearly, though, something powerful was going on. “New distribution channels change who the customers are,” Drucker wrote. “They change not only how customers buy but also what they buy. They change consumer behavior … industry structure—in short, the entire economy.”

Now Amazon is once again changing the definition of who the customer is. Or perhaps more accurately, the company is making it increasingly evident to publishers who the customer is not: Amazon itself.

PUBLISHERS’ RIVAL

Instead of acting merely as an online retailer of books, Amazon is aggressively positioning itself as a publishing competitor, directly signing up talent on its own. This month, for instance, Amazon announced it would publish actress Penny Marshall’s memoir, My Mother Was Nuts. Apparently the company outbid traditional publishers for the title. Other big names in Amazon’s stable include self-help author Tim Ferriss and thriller writer Barry Eisler. In all, Amazon plans to publish 122 books this fall in print and electronic editions.

Meanwhile, the company must adroitly manage the entire process. For Amazon—and any other business contemplating turning partners and suppliers into head-to-head rivals—its strategy is full of both promise and peril.

In the most basic sense, the model Amazon is pursuing (where it inks a contract with a writer, publishes his or her book, and then delivers it to a consumer either in hard-copy format or via a company-built Kindle e-reader) is a throwback to the days when enterprises were more vertically integrated.

Companies moved away from this approach for a simple reason: They found that they improved their performance when they narrowed their activities. It’s really a “19th-century belief that a modern company tries to do everything for itself,” Drucker asserted. Indeed, for Amazon, perhaps the greatest danger it faces as it pushes to become “an end-to-end service,” in Chief Executive Jeff Bezos’s words, is that it will become too splintered. “Effectiveness,” Drucker wrote, “requires focus.”

MORE CHOICES, LOWER PRICES

Alienating the major publishing houses, which remain among Amazon’s main suppliers, may also not be good for business. Even companies that drive change through an industry, such as Amazon, “still require continuity,” Drucker commented. “People need to know where they stand. … They need to know what they can expect. They need to know the values and the rules of the organization.” In fact, Drucker added, “to be able to change rapidly, one needs close and continuous relationships with suppliers and distributors.”

Nonetheless, despite the possible pitfalls, I don’t suspect Drucker would advise Amazon to pull back. After all, there is a significant chance that the company will score a great success, particularly if this new direction leads to its customers getting more of what they value. Already, signs are that as a publisher, Amazon is positioned to provide book lovers with more selection and lower prices.

By answering, “What will our business be?” management seeks to stay a step ahead of “anticipated changes,” Drucker wrote. “It aims at modifying, extending, and developing the ongoing, existing business. But there is need also to ask, ‘What should our business be?,’” he continued. “What opportunities are opening up or can be created to fulfill the purpose and mission of the business by making it into a different business? Businesses that fail to ask this question are likely to miss their major opportunity.”

THREE TYPES OF OPPORTUNITIES

In his 1964 book, Managing for Results, Drucker described three different kinds of opportunities that managers can try to exploit. The first is the “additive opportunity,” whereby a company takes fuller advantage of its existing resources. There’s also the “breakthrough opportunity,” which, according to Drucker, “changes the fundamental economic characteristics and capacity of the business.” Think, for example, of IBM’s (IBM) shift from computer hardware to services.

In the middle falls what Amazon is going after—the “complementary opportunity.” This “offers something new, which, when combined with the present business, results in a new total larger than the sum of its parts,” Drucker wrote.

The trick is in realizing that multiplier. “The complementary opportunity will always require at least one new knowledge area in which excellence has to be attained,” Drucker explained. And that, in turn, implies considerable risk. “If it appears riskless,” Drucker wrote, “it is to be shunned as self-delusion.”

Most analysts looking at Amazon’s foray into publishing have commented almost exclusively on the serious threat that the company poses to others in the industry. There’s a good reason for that. As Drucker put it: “Market and industry structures are quite brittle. One small scratch and they disintegrate, often fast.”

Yet as it forges ahead, Amazon also will encounter its share of hazards, including the potential to lose its way, disrupt its supply chain, and fail to gain the expertise it needs to master the art of publishing. To ignore any of this is to misread the situation.

    Before it's here, it's on the Bloomberg Terminal. LEARN MORE