Strategy

Amazon’s $13.7 billion purchase of the Whole Foods Market chain, which is now a done deal, has grocery shoppers salivating at the thought of never having to walk into a supermarket again. Likewise, entrepreneurs and artisans behind the upscale products that fill Whole Foods’ shelves see the upside of Amazon leveraging its constant growth and ubiquitous brand to bring their goods to a wider audience online at a price that no longer reeks of “whole paycheck.” But for the rest of us left trying to read the fair-trade tea leaves, Amazon’s latest move is a little confusing. Why Whole Foods? Why now? And why did Amazon CEO Jeff Bezos decide to buy the Washington Post four years ago? For these questions, we turn to Stanford Professor Kathleen Eisenhardt, a leading scholar on strategy and organization in technology companies and high-velocity industries. While she is on faculty in the university’s engineering school, Eisenhardt says Amazon’s business dealings remind her of experiments in genetic modification. Organizations can simultaneously be thought of, and act as, monolithic entities and smaller components or genes acting in concert, according to Eisenhardt, who holds the S.W. Ascherman M.D. professorship in Stanford’s Department of Management Science & Engineering. By understanding that there are specific, gene-like areas that can be “mutated,” leaders can think more nimbly about how to innovate and scale without unwinding the helix of an entire organization. In other words, the 470-store chain that proudly promotes its many non-GMO products now finds itself owned by none other than a Genetically-Modified Organization. The good professor elaborates below … Stanford eCorner: You say that Amazon’s top business priority is growth, not profit. And the price cuts Amazon has made across Whole Foods products signal that. Why does a strategy focused on growth, rather than profit, make sense here? Kathleen Eisenhardt: Growth over profit has been the Amazon strategy from day one. More accurately, the Amazon strategy is to sell to customers whatever they want at the best possible price, and however they want to buy it. Practically speaking, this ends up favoring growth over profit. It’s also why Amazon was originally named “Amazon” – for the river – and not something limiting like “Books Now.” The best and most reliable way to grow a company is to leverage existing resources into new markets. Resource leverage works particularly well for Amazon because low profitability in new markets is not the deterrent that it is for most other firms. Amazon simply enters the markets in which customers want to buy products. So growth over profit doesn’t make more or less sense in the context of Amazon. Rather, it is what Amazon does! eCorner: Speculation from industry watchers has ranged from the acquisition being Amazon’s play to beat Walmart in the fresh-foods sector, to it being a move to increase its warehousing capacity to serve existing and new customers. How do you see it? Eisenhardt: The acquisition is a quick way to build a physical presence, rather than starting from scratch. And from what I know, the goal is, again, serving customers regardless of what they want to buy. So it’s not about beating Walmart, although that might happen. Vertical integration is not key, either. Instead, they are offering what customers want to buy and how they want to buy it! There’s a lesson here for entrepreneurs whose goal is growth: Don’t waste time worrying about competitors and markets. Focus on knowing and understanding your audience’s needs fully, and evolving with your customers to make your products and services absolutely essential. eCorner: You describe an interesting way to make sense of Amazon’s moves – by seeing the various components of its business model as genes, and how new initiatives are essentially Amazon “mutating” a given gene so as to produce a different outcome. Could you explain this a little more? Eisenhardt: Amazon has product, channel, country, customer, and fulfillment “genes” – genes for every core aspect of its business. It is constantly mutating single genes, like at the start when the company started with books and then added music, video and other products – mutating the “product” gene. But every so often, Amazon mutates many (but not all) genes, like the introduction of marketplaces and web services. They then go back to make lots of small single-gene changes. The strategy is very organic and very smart from an evolutionary biology lens: many small changes and occasionally big ones. The Whole Foods acquisition is remarkable only in that Amazon seems to be using it to speed its evolutionary progress. But it’s not different from what the company has consistently done before – a major gene change in channel, but same customers, geography and even products as those covered by its existing Amazon Fresh service. Metaphorically speaking, entrepreneurs may want to look at their venture at microscopic level and unpack its DNA. Adjusting the focus and seeing their organization in more detail can reveal opportunities for change and, ideally, growth. If Amazon has “genes” for product, channel, customer, and country, what genes does your organization have? Which genes can you tweak for growth, or which are you stuck with? How will you continue to grow? Consider taking a page from Amazon’s evolutionary playbook.

Businesses and entire industries are coping with major uncertainty due to President Donald Trump: from carmakers that fear his next tweet, to health insurers who can’t set coverage rates because of the ongoing fight to repeal the Affordable Care Act. Rohan Bhobe is the CEO and co-founder of a technology startup that earned its chops by fixing key parts of the HealthCare.gov website after its clunky launch in the fall of 2013. So you’d think he and his fellow co-founders at Nava – a public benefit corporation – would be downright nauseated from following every twist and turn of the healthcare debate. How could any business move forward if its biggest customer decided it should dismantle the program that gave the business its start in the first place? Well, the young entrepreneurs at Nava aren’t asking that question, and in fact, are more certain than ever about their work, which is building modern web platforms for government agencies that deliver services to the public. For HealthCare.gov, Nava moved critical systems to the cloud, dramatically streamlined the online-application process, and “hot swapped” the original identity-management system that had caused most of the initial site outages – saving “tens of millions of dollars” in taxpayer costs, according to Bhobe. In the process, this agile group of go-getters from Silicon Valley gradually found their stride in the stodgy District of Columbia. “We got better at shipping modern product in the context of a government environment,” Bhobe explained, “and as government also became more familiar with our techniques, we were able to work together faster.” He and his team developed a cadence of learning and a growing confidence that their skills might be better applied in Washington than the West Coast. And the prospect of improving how government serves people aligned strongly with the entrepreneurs’ personal values. Now, with Trump in office and Republican majorities in both houses of Congress, the effort to dismantle the Affordable Care Act drags on as the party in power struggles to come to a consensus on provisions for a replacement plan. So again, why aren’t Nava’s founders freaking out? Simply put, their confidence stems from a complete faith in their team’s unique skills and strengths in engineering the delivery of government services, as well as a clear understanding of who their customers really are: the American people. Neither of those facts bend for a new Commander in Chief or anyone else. It’s an important lesson for every entrepreneur: Your special talents, and a high-fidelity image of the people you’re serving, should be the steel guardrails for your venture. “We work with government as our partners to serve, ultimately, the American people,” Bhobe said. “It was great to see our commitment extend beyond any particular authority figure in government; and it sharpened our focus onto people and their needs, and working on their behalf.” Not that Nava’s founders didn’t voice how they personally felt. In a blog post published a month after the election, Nava’s founders strongly rejected many of Trump’s actions and statements during the 2016 presidential campaign. As a public benefit corporation, Nava wears its values on its sleeve. “We believe that when our democracy commits to a public service, it should deliver in a way that is equitable and effective,” Nava Co-Founder Sha Hwang stated on Medium. “Our work is a tireless pursuit towards this goal. We believe that the software powering these services can be radically reimagined to improve the quality of people’s lives.” But now that those in power are trying to figure out how to get out of that commitment, Bhobe says Nava is responding to the uncertainty by increasingly turning to other types of organizations to get a clearer picture and work together toward the outcome they’d like to see. These include healthcare foundations, political institutions, and experts in everything from data ethics to design. “We’re all in a wait-and-see mode about what the priorities are going to be,” Bhobe said. “The uncertainty is not a positive thing.” Indeed, recent entrepreneurship research has shown that one way startups respond to market uncertainty is by forming strategic alliances. Specifically in the healthcare space, studies at Stanford University have found that medical-device startups formed ties with different types of stakeholders to hedge unpredictability in both product development and the commercialization process. In a 2015 study by Stanford entrepreneurship professors Riitta Katila and Kathleen Eisenhardt, along with lead author Emily Cox Pahnke at the University of Washington, they found that network ties with certain partners were especially beneficial when medical-device development was highly ambiguous. “These startups got different benefits from different partners,” said Katila, a professor in Stanford’s Department of Management Science & Engineering. “Government gave them credibility. Ties to private investors, strategic and managerial advice. Ties to corporations, manufacturing and marketing resources.” In a subsequent paper by Katila, who studies technology strategy and innovation, she and her co-authors found that med-tech startups handle uncertainties in the environment by forming relationships with doctors and bringing them in as collaborators. “Uncertainty” in this context was around possible changes in FDA standards and whether a drug or device would be approved. Katila recalled an interview with an orthopedic surgeon, where he explained why a medical-device startup had reached out to him. According to Katila, the doctor described how vagueness in the regulatory landscape meant a trial designed according to standards in place at the time might yield irrelevant results and waste much money, time and effort. “Even if you do a design like that right now that the FDA approves, when you go back to [the] panel in three to five years, the reviewers are likely to have changed their minds to reflect more current standards of care,” the doctor told the paper’s authors. “If the company had gone without clinical input, they would have been up a creek.” At Nava, reaching out to other stakeholders predated Trump’s election, according to Bhobe. The company’s goal was never to be the sole builder of all technology for the government, he said. But at a time of great uncertainty, strategic alliances seem to be more important than ever – whatever form they may take. “We’ve come to realize that success in this environment, independent of any kind of political party, is going to be a messy ecosystem of groups, pushing long term in fits and starts,” Bhobe explained. “It’s not as clean, but I think that’s OK.”