An Example of Unprecedented Success in the Retail Industry: Amazon from a Different Perspective

Jip Kelderman | 18 September 2018

How did Amazon became so successful and what are the implications of their growth for their recruitment process?

By Rubin Mehlhorn and Ujendre Ramautarsing

Background

Amazon.com had become the poster child of internet commerce. The company started as an online bookseller in 1994. As of September 4th, 2018, the company ticked as second company ever, after Apple, the market capitalization of approximately $ 1000 BN. Jeff Bezos, current founder and CEO, was intrigued by the rapid penetration of the internet. Especially, he believed that retail could become the internet’s killer application. Internet could offer the customer a value proposition at a relatively low cost and reach out to all customers around the world. The total value of goods sold over the web started to increase significantly. The number of web users grew, the majority of customers were highly educated and had sufficient spending power – allowing them to do purchases on the internet. Deciding to retail online gave the company advantages such as a centralized inventory management, low occupancy costs and high sales per employee. Above that, retailers could easily trace the consumers purchasing patterns and anticipate on this. In comparison, a retailer who opens a new physical store increases his labor, inventory and occupancy costs. A web-store has, besides the costs for fulfilling customer services, mostly fixed costs. As a result, the company can invest more money in systems and services. Retailing through the internet made it possible to remove layers of the distribution chain and their associated costs. This would provide customers with added value.

Bezos listed numerous retail categories in which he thought consumers might wanted to purchase online. By researching the top five, he meticulously selected books as initial category. In combination with the Internet, Amazon.com could provide customers with the largest book selection for discounted prices. Additionally, the internet platform would create an interface with the ability to interact with other readers. The most important reason for deciding on books is that the bookseller industry is highly fragmented. No bookseller had successfully built a leading global brand. In other words, there was no competitor for the leading role but an opportunity to become one. Secondly, the worldwide book industry was large and expected to grow over the coming years. The concept was an ideal scene as the company could locate itself near the warehouse of leading book distributor Ingram. These distributors bought inventories from publishers in large volumes, with hence, lower prices. This enabled the company to have high inventory turns, because they ordered directly at this distributor, and a rapid cash conversion cycle –  1 day of receivables, 7 days of inventory, and 41 days of payables.[1] To summarize, Amazon started in a growing market, with an unlimited reach of customers. Complementary, they had capital advantages, in comparison with physical stores, and could remove layers of the distribution chain. Taken as a whole, there was no leading global brand that existed yet.

[1] Based on calculations from the company’s early financial reports (i.e. early stage/pre-IPO time window).

Next, we briefly delve into the current business model and how it at that time – early stage/pre-IPO time window – differentiated from its competitors. Porter (1985) describes the value chain and the value system in his paper. He argues that the value chain consists of two parts, namely the primary and the supporting activities. The upper part of the value chain consists of the firm’s infrastructure, HRM, technology development and procurement which are the supporting activities and make it possible that the primary activities can exist and being coordinated. The lower part of the value chain starts with inbound logistics and ends with service, and are the primary activities which create value for a product (Porter, 1985). Secondly, the value system enables that relationships can interconnect with each other between different companies. Incumbent companies relative to Amazon.com applied the traditional value system instead of Amazon which adapted the value system by cutting two chains from the value system, namely the Firm’s value chain and the Channel’s value chain. Amazon directly sold their books to its end-user customers instead of their competitors, just as Dell did with his computers. For Amazon.com, physical stores were not needed anymore because customers could order the book on the internet. What Amazon did is they have rethought how value was created for their customers. The speed of distribution is therefore an organization capability for Amazon and also a competitive advantage.

Figure I: Overview of value chain and value system by M. Porter (1985). Source: Porter, M. (1985). “Towards a dynamic theory of strategy”. Strategic Management Journal. Vol. 12 (1991),  pp. 95-1.

Amazon’s business model of a short value system focusses on the long-term period instead of the short-term period, allowing for significant losses in the first four/five years and involves investments in marketing and promotion, site development and technology, and operating infrastructure development. Main focus of Amazon’s strategy is that it looks at customer value which can be achieved through differentiation of services over the internet. Economies of scale can be realized through high sales volume and cost-efficiency by using only one (i.e. early stage/pre-IPO period) centralized inventory superstore. A complete overview between Amazon and traditional companies is provided in Figure II.

Figure II: Comparison between Amazon and traditional companies. Hence, based on literature.

Where we focused in the aforementioned on the early stage, or also referred to as the pre-IPO period of the company, we now examine some business developments. Over the course of 20 years, the company has proven to be successful – whether it is via acquisitions (e.g. takeover of Whole Foods Market in 2017) or launching a prime subscription service. For the sake of being brief and concise, we present a timeline to demonstrate Amazon’s expansion across multiple industries. Hence, this figure has been constructed with aid of professional data sources (e.g. The Wall Street Journal, The New York Times etc.). Figure III reveals this overview.

Figure III:This figure gives an overview of Amazon since its inception in 1994. Source: See multiple links in Appendix. Hence, manually constructed by author.

Recruitment Strategy

Growing your company goes hand in hand with hiring new people. One might wonder whether Amazon applies a state-of-the-art recruitment strategy. First, in terms of numbers, Amazon is increasingly employing more people across the globe – mainly domestically in the United States. According to data from Statista, Amazon employed approximately 66% more people in 2017, compared to a year earlier.[2] Their data suggests Amazon had 566K employees in 2017.[3] Although hiring is expected to increase in 2018 as well, it’s important to realize that a lion’s share of their hiring consists of low paying jobs (e.g. warehouse employees). In addition, an article from The Seattle Times reported that the median pay was around $28,446 in 2017, in contrast to its headquarters in Seattle with an average pay of $110,000.[4] Furthermore, in terms of metrics, entry-level position’s pay differs between $11 and $16 an hour.[5] Note that the recruitment process is frequently a daunting process, especially for highly educated (tech) roles. At first exploration, Amazon mentions that its recruitment process varies by position, which seems logical as a different skillset is required for each role.[6]

Their job-section reveals what Amazon values as most important and how the recruitment process is setup. First, like any other company, this process frequently includes but is not limited to, an online application, a phone-interview and/or a face-to-face interview. Remarkably, the company clearly mentions its Culture and Leadership principles.[7] Its cultural principles are nurtured by in-depth stories of fellow Amazonians to get a grasp of the company. Besides that it elaborates on 14 leadership skills, which are deeply ingrained in the day-to-day practices.

“All candidates are evaluated based on our Leadership Principles. The best way to prepare for your interview is to consider how you’ve applied the Leadership Principles in your previous professional experience.”[8]

Interestingly, as is well-known for top notch positions – mainly in Investment Banking, Private Equity, Quant and Strategy Consulting – is the practice of so called brain teasers. The company explicitly states the following:

“We avoid brain teasers (e.g., “How many windows are in Manhattan?”) as part of the interview process. We’ve researched this approach and have found that those types of questions are unreliable when it comes to predicting a candidate’s success at Amazon.”[9]

More attention is paid to Software Development topics, with its customer-centric focus in mind. Technical topics include but are not restricted to programming language, data structures, coding, operating systems and general machine learning and artificial intelligence (IA).[10]

A more in depth article has been provided by The New York Times by Kantor and Streitfeld (2015) and by Ralf Knegtmans (2016)[11].  The take away is as follows, although Amazon is currently successful, it in some degree has put constraints on the company in terms of HR and its job retention. For high level positions, HR is very demanding, selecting only the best people in town.

Bezos is convinced of the importance to select only the very best people. He uses three crucial questions that according to him had a huge impact on the performance of Amazon. These  questions are:

  1. Would you admire this person? Is the person inspiring for the team, can he add value to the team, can the team learn from the candidate?
  2. Would this person increase the ROI of Amazaon? The mentality is that the bar needs always to be increased, also for the recruitment process.
  3. What are the dimensions of this person to be a super star? These dimensions are not by definition business related, but should contribute in creating a inspiring work climate and further development of the culture.

The ingrained culture – both on the top and low level – are focused on individual and company performance, with the customer in mind. You either fit within the company, or you don’t. Some employees opened up an did their story at The New York Times.[12] The demanding nature occasionally contributed to high pressure, overtime, and fear of missing out. According to the stories, there sometimes seems to be less eye for worker’s private circumstances. For instance, it was mentioned that private concerns (e.g. maternity) had a negative impact on the individual’s ranking.[13]  Also, a handful of employees were not enthusiastic about the “Anytime Feedback Tool.”[14] This feedback tool employed at Amazon is data driven, and seeks to monitor employees on different aspects. For example, it is possible to anonymously provide feedback to your counterparts, with the manager having all the options to witness the source’s comment. Feedback knows no boundaries, as it aids in becoming more self-aware. This has the following consequences for HR: (1) Amazon’s enormous growth spurs hiring; and (2) since some people struggle with its competitive firm culture, employee retention is low(er) and thus hiring also needs to be done more frequently. As a result, only the best remain. On the other hand, one might hypothesize that the demand for more people might loosen the company’s standards in order to fulfill the job positions. Albeit, this may deviate from Amazon’s strategy.

Summarizing the aforementioned points, it seems Amazon’s recruitment procedure is more or less similar to comparable firms,  with recognition for the approach to hire only the best people.  Al basic elements – a phone interview and assessment (e.g. SHL / Kenexa) etc. – are part of the recruitment process.[15] The focus appears to be on leadership and culture. Through practical examples, one has to show it fits within Amazon’s framework. For tech roles, demonstrating skills is key. As expressed by numerous people, the work environment on some levels in the company, can be tough, leaving only the best.

Implications for job seekers

If you are currently at the bottom of the job market (e.g. less educated or student) operational jobs will be heavily affected in the future. For instance, the picking process can be automated with robots making you redundant. Amazon and Alibaba already have warehouses where robots move the stacking rack to the picker. The computer knows where the randomly stacked items are located, and hence calculates the shortest route.[16]

In sum, the contemporaneous job market is full of challenges and opportunities. Recognizing the trends early on can cause a leap frogging effect in which the necessary skills can be learned for the future. It therefore matters to observe, research, and read about successful and innovative companies.

 

[2]https://www.statista.com/statistics/234488/number-of-amazon-employees/
[3]https://www.statista.com/statistics/234488/number-of-amazon-employees/
[4]https://www.seattletimes.com/business/amazon/amazon-workers-median-pay-in-2017-28446/?utm_source=twitter&utm_medium=social&utm_campaign=article_left_1.1
[5]https://www.seattletimes.com/business/amazon/amazon-workers-median-pay-in-2017-28446/?utm_source=twitter&utm_medium=social&utm_campaign=article_left_1.1
[6]https://www.amazon.jobs/en/landing_pages/interviewing-at-amazon
[7]https://www.amazon.jobs/en/principles
[8]https://www.amazon.jobs/en/landing_pages/phone-interview
[9]https://www.amazon.jobs/en/landing_pages/phone-interview
[10]https://www.amazon.jobs/en/landing_pages/p-software-development-topics
[11] Knegtmans, Ralf. “Agile Talent”. Business Contact, 2016
[12]https://www.nytimes.com/2015/08/16/technology/inside-amazon-wrestling-big-ideas-in-a-bruising-workplace.html?_r=0
[13]https://www.nytimes.com/2015/08/16/technology/inside-amazon-wrestling-big-ideas-in-a-bruising-workplace.html?_r=0
[14]https://www.nytimes.com/2015/08/16/technology/inside-amazon-wrestling-big-ideas-in-a-bruising-workplace.html?_r=0
[15]https://www.jobtestprep.co.uk/amazon-assessment
[16]https://www.youtube.com/watch?v=cLVCGEmkJs0

Further References

Website Amazon: https://www.amazon.com/

Porter, M. (1985). “Towards a dynamic theory of strategy”. Strategic Management Journal. Vol. 12 (1991),  pp. 95-1.

References used by year for timeline construction

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  • https://aws.amazon.com/about-aws/
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