Apple vs Amazon – business model strategy in action
“Business model” is important in achieving sustained competitive advantage, is a hugely powerful weapon in the strategic armoury but is often greatly misunderstood.
One of the problems is that the term “Business model” (I’ll say BM from now on) gets confused with Pricing when in reality, the latter is a function of the former. So pricing is a function of BM whereby margin is captured in a certain way, for certain things and at a certain time depending on the BM you employ.
BM is part of the trio of strategic pillars on which a business sits and is therefore hard to change. Imagine trying to change the business model of an insurance company. Such organisations are built on a BM that makes money from collecting money for any given risk from the many and paying out to the few. Which is why such bodies are run by actuaries and underwriters and behave in the way they do. BM forms part of the identity of the organisation, its culture and behaviour, driving prioritisation of investment decisions, capital structures and the work that gets done inside the business.
What this all means is whilst price can be adapted to suit market conditions, business model is much harder to change. And that’s why it can be a source of competitive advantage.
The battle between Amazon and Apple is a great example of this in action.
Amazon is a retailer interested in retailing: books, films, music, now electronics and god knows what in the future. So its BM is all based on profit per product and their rate of sale. This means they prefer to sell volume items at a decent margin. So when they looked at their digital book business, they decided to make the money on the books and cover costs with the Kindle.
Apple on the other hand is an out and out technology manufacturing company. This means they make their money form selling hardware devices and everything else – software, content, apps etc – are important to the consumer but peripheral to the bottom line. So when it comes to digital book readers it has invested in software that enables the 1-pad to become a competitor to the Kindle and promote this to book readers to generate profits. However, it has ensured i-pad compatible books are available (to make the product valuable) but chooses to only recover costs on i-tunes, mimicking its strategy for the ipod.
The fascinating battle playing out in the digital book market at the moment involves two behemoths with two completely different business models. So who’ll win in this battle? The customer essentially has a choice between a lower cost task specific device (Kindle) with higher consumption costs or a more expensive multi-application device (i-pad) with lower consumption costs. I suspect both will carve out market positions and thrive but there’s won’t be room for many competitors. Unless someone comes up with a completely different business model. Time will tell.
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