RETAIL SPECIAL Can Amazon Do What Walmart Couldn’t, Stop the 'Wheel of
Retailing'?
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Walmart couldn't do it. Now it's Amazon's turn to break the
theory of the "wheel of retailing." Can Amazon succeed? Is the wheel
model even a helpful concept anymore? asks James Heskett.
In 1997, a young entrepreneur visited a class at Harvard
Business School taught by my colleague, Len Schlesinger. The class discussed a
case based on the visitor’s fledgling online retailing company that had rapidly
expanded sales to $100 million. The main issue of the case had to do with
avenues for growth for the company; what would consumers want to purchase
online that would fit into a rapid response distribution model? Students
rejected numerous options involving lower-value items such as dog food, which
would require expensive storage and transport costs.
At the end of the discussion, the visitor commended class
members for the depth of their analysis—then chided them for their limited
vision. Of course, the company was Amazon and the visitor was Jeff Bezos. And
his own view for the company was nothing less “sell everything to everyone
everywhere.” Including dog food. (Twenty years later another colleague relies
on Amazon for delivery of dog food to a remote location in Maine at a price
comparable to the local supermarket.)
There is no question that Bezos has built a retailing
juggernaut, one that is capturing the largest share of market in product
category after category. His success raises a question: Can Amazon successfully
defy a notion—the wheel of retailing—that has been debated in retailing for
nearly sixty years?
The wheel of retailing was first described by Malcolm McNair, a
distinguished faculty member at HBS beginning in 1920 who, after completing
work in Shakespeare and English, became fascinated with the retailing field. In
1958, he described what was happening in the world of retail after the Second
World War.
He observed that new retailing concepts typically begin with
low-price strategies with the goal of attracting customers. As the number of
customers and the volume of sales increase, the retailer gains a dominant
position in the market. The goal gradually shifts from attracting more
customers to increasing prices and margins in order to achieve higher profits.
That subjects retailers to new competition from low-priced, low-service
startups, thus spinning the wheel of retailing again.
The concept fell out of favor with the ascendancy of big box
retailers, especially Walmart. Walmart gained such a dominant share, driving so
many higher-priced, higher-margin competitors out of business, that it was
believed that the only limit on the company’s growth and profit was the size of
the global retail market itself. No competitors could successfully undercut
such a retail phenomenon. The wheel of retailing had been stopped!
Until, of course, the internet came along. Walmart was slow to
react to online retailing, favoring its brick and mortar big box stores
instead. Amazon, unburdened by such real estate, was easily able to mobilize
Internet capabilities in order to capture a dominant share of a notoriously
inefficient book retailing industry. It didn’t stop there. And now it is
systematically moving into new product categories, including those served by
Walmart.
Amazon’s success raises questions about the future of retailing.
Is an “Amazon 2.0” even now in the early stages of design and introduction? Is
the wheel of retailing any longer a valid or helpful concept?
Can Amazon do what Walmart couldn’t: stop the wheel of
retailing?
References:
James L. Heskett, W. Earl Sasser, Jr., and Leonard A.
Schlesinger, “Leading for the Future of Services,” Chapter 8 in What Great
Service Leaders Know & Do (Oakland: Berrett-Kohler Publishers, Inc., 2015),
pp. 191-224.
M. P. McNair, “Significant Trends and Developments in the
Postwar Period,” in A. B. Smith (ed.), Competitive Distribution in a Free High
Level Economy and Its Implications for the University (Pittsburgh: University
of Pittsburgh Press, 1958), pp. 1-25 at pp. 17-18.
by James Heskett
http://hbswk.hbs.edu/item/can-amazon-do-what-walmart-couldn-t-stop-the-wheel-of-retailing?cid=spmailing-15580464-WK%20Newsletter%2006-14-2017%20(1)-June%2014,%202017
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