Wednesday 31 May 2017

Retail innovation

New Zealand retail's problems are deeper than a 15% GST-at-the-border levy. Here's what Amazon is doing. Marvel at the innovation.
This all said, I believe that Amazon is the most defensible company on earth, and we haven’t even begun to grasp the scale of its dominance over competitors. Amazon’s lead will only grow over the coming decade, and I don’t think there is much that any other retailer can do to stop it.

The reason isn’t the bullet-point moats that are talked about in headlines, and it isn’t the culture of innovation or Bezos’s vision as CEO (though I do think Amazon’s culture is incredible and Bezos is the most impressive CEO out there). It’s the fact that each piece of Amazon is being built with a service-oriented architecture, and Amazon is using that architecture to successively turn every single piece of the company into a separate platform — and thus opening each piece to outside competition.

I remember reading about the common pitfalls of vertically integrated companies when I was in school. While there are usually some compelling cost savings to be had from vertical integration (either through insourcing services or acquiring suppliers/customers), the increased margins typically evaporate over time as the “supplier” gets complacent with a captive, internal “customer.”

There are great examples of this in the automotive industry, where automakers have gone through alternating periods of supplier acquisitions and subsequent divestitures as component costs skyrocketed. Divisions get fat and inefficient without external competition. Attempts to mitigate this through competitive/external bid comparison, detailed cost accountings and quotas usually just lead to increased bureaucracy with little effect on actual cost structure.

The most obvious example of Amazon’s SOA structure is Amazon Web Services (Steve Yegge wrote a great rant about the beginnings of this back in 2011). Because of the timing of Amazon’s unparalleled scaling — hypergrowth in the early 2000s, before enterprise-class SaaS was widely available — Amazon had to build their own technology infrastructure. The financial genius of turning this infrastructure into an external product (AWS) has been well-covered — the windfalls have been enormous, to the tune of a $14 billion annual run rate. But the revenue bonanza is a footnote compared to the overlooked organizational insight that Amazon discovered: By carving out an operational piece of the company as a platform, they could future-proof the company against inefficiency and technological stagnation.
Read the whole thing. Amazon is amazing. There's a reason that you can parallel import things, as a consumer, for a much bigger price discount than the 15% GST gap.

I've been a skeptic about arguments for applying GST at the border, mostly because the main methods for doing so amount to non-tariff barriers: holding goods up at customs pending GST payment. I also think that if there's a distortion favouring imports because of the GST issue resulting in some allocative inefficiency, we should also consider that competitive pressure from those fringe parallel imports may make prices for domestic consumers more competitive as well.

But if Amazon does become increasingly dominant, that does simplify things a bit - if Amazon were willing to collect GST on its shipments to New Zealand.

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