Blue Ocean Strategy - Amazon
Context - case study from the LSE
-
In 2014, Amazon filed a truly unique patent. Its idea is to use giant airships suspended kilometres above the earth’s surface to serve as warehouses. These airships, that look similar to German Zeppelins of the early 1900s, will store merchandise (BBC, 2016).
The patent also articulates that drones will dispatch products to customers who have placed orders online (Kharpal, 2016). Due to the proximity of the warehouse to customers and the use of drones, customers will enjoy quicker delivery times. The innovation will also make it possible to deliver perishable items, such as prepared meals. A warehouse’s supply of drones will be replenished periodically by other smaller airships that act as shuttles (BBC, 2016). text goes here
Context - question from the LSE
What would be required for selling books using flying warehouses and delivery drones to be a Blue Ocean innovation in the bookselling market? Articulate your response using a hypothetical example.
My thoughts - answer for the LSE
A BOS is ‘the simultaneous pursuit of differentiation and low cost to open up a new market space and create new demand.’ Drone delivery benefits the consumer due to faster delivery time and airborne fulfilment centres (AFC) allow hyper-localised supply.
Blue oceans are seldom about technology innovation. The underlying technology is often already in existence (i.e. IBM 360 a notable exception). This case study would fall into the IBM category (value and technology pioneering).
Consider the key characteristics of blue ocean strategy:
Uncontested market space – given the scale and complexity of this R&D effort, there are significant barriers to imitation. Delivery by land is a known market space (red ocean) and delivery by air is uncontested (blue). Competitors have, however, applied for licenses.
Competition - Chan & Mauborgne use Cirque and Ford as examples of making the competition irrelevant. Amazon has 1137 fulfilment centres in the US, each serving 292k people on average. Hypothetically, AFCs across the US would make the competition irrelevant (i.e., 30 mins delivery to anyone). A drone can fly 9 miles, and the US population density is 100 people/square mile, we can approximate that an AFC would serve 324 square miles. To realise this BOS, each AFC would serve 32k people. This would require 10,247 AFCs across the US. We can assume 250 drones per AFC, therefore 2.6m drones required.
Create and capture new demand – To create new demand would require a major marketing initiative (books delivered anywhere in the US within 30 mins). Amazon sells tens of millions of books, Amazon needs appropriate local supply in each AFC to maximise convenience as a utility. Without this, a customer would be willing to wait for next day delivery or drive to a nearby bookstore. Price corridor of the mass argues you must set a price that will capture the mass of target buyers. Amazon need to consider the price sensitivity of the customer as well as drone delivery price relative to book price.
Value-cost trade-off – Ford & Cirque offered the mass of buyers a leap in value and achieved the lowest cost structure. It is estimated that cost per package of drone delivery will be $63 by 2025. AFC costs would be incremental to this. Breaking the cost-value trade-off for books looks incredibly challenging. To make the BOS work Amazon would need to re-work the unit economics of each drone delivery beyond books (number and value of items). Note, this trade-off would vary by geography. For example, there would be new value for low cost for 82% of Alaskan customers.
The hypothetical answer outlines numerous challenges in making this business model profitable. This helps us understand why Amazon did not move beyond the patent. The innovator should always aim to increase profitability. BOS is achieved only when utility, price and cost activities are aligned. The time and cost to operationally realise the AFC strategy was not sustainable. This is analogous to the current investor frustration with the Metaverse.