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Scaling Edges: Amazon case study

About Pragmatic Pathways: New approaches to organizational change

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When AWS was launched in 2002, many thought it was simply a way for Amazon to sell off excess storage and computing capacity. However, within two months of its inception, Amazon had burned through all of its extra capacity. In fact, by 2007, AWS had grown to offer nine different services. Today, that number has grown to 82, and the number of objects stored in Amazon’s cloud continues to grow exponentially. Morgan Stanley analysts estimated revenues for 2011 to be $1.2 billion, and projections are that the business could grow to $2 billion by the end of 2012.  Although AWS still only constitutes a small percentage of Amazon’s $48 billion business, Amazon’s leadership sees it as having lots of room to grow. To truly be an edge, an opportunity has to have the potential to scale and transform the core business; earlier this year, Jeff Bezos, CEO of Amazon, said:

[AWS] has the potential to be as big as our retail business. It’s a very large area and right now, [cloud computing services are] done in our opinion in a very inefficient way8.

One of the most interesting aspects of AWS is that while cloud services seem fundamentally different from the online marketplace that Amazon is known for, cloud services are actually part of the same broad vision. AWS serves as a nonobvious adjacency that has allowed Amazon to leverage many of its existing capabilities from its retail arm. Amazon had developed an expertise in distributed computing within its company, which has lent itself to providing AWS as a service. This expertise has led Amazon to transform the adjacency into an industry-leading business. From the beginning, Amazon realized the opportunities for this service. As Werner Vogels, the Chief Technology Officer of Amazon, observed:

The excess capacity story is a myth. It was never a matter of selling excess capacity … Amazon Web Services was always considered a business by itself9.

The move into cloud computing may be pivotal for Amazon, not only because it gives the company access to new markets, but because the market can also potentially bear higher margins for services than commodity retail products.

Amazon’s AWS is an example of what we call scaling edges, which is a framework and a set of design principles focused on large-scale institutional transformation. It requires focusing on promising high-growth areas, or edges, that have the potential to change the core of the business in the long run. To ensure the best chance at this, the edge must avoid direct conflict with the core of the business by playing in a different space in the short run. This will allow the edge to grow and become an established, proven, and viable model before encountering the full range of financial and political obstacles that come from directly challenging to change the core business. In the case of the AWS edge, the cloud services space is adjacent to rather than in direct conflict with Amazon’s core online retail business.

Often, the organizations that need change the most are those that are the most resistant to it. The scaling edges framework helps to circumvent the political and financial resistance that usually arises with any change effort. While this resistance may not have surfaced within Amazon, as AWS was driven by the founder, it is a common problem in many firms that are less open to change.

There are several principles any organization can adopt to scale an edge:

Focus—Firms should identify and focus on “edge” initiatives that follow four principles. An edge should:

  1. Align with fundamental market forces and the long-term vision of the business and market: For Amazon, this came with understanding the strong growth potential and high margins of cloud-based services.
  2. Require minimal investment to initiate: In addition to Amazon’s excess capacity, Amazon had already developed many key technologies and internal capabilities (particularly around distributed computing) that could be leveraged for AWS. This allowed Amazon to test its ability to host cloud services with little investment.
  3. Have the ability to “grow the pie,” or create revenue in the short term that does not conflict with the core of your business: The revenue streams from AWS were almost immediate and did not cannibalize any of Amazon’s core business on its online marketplace.
  4. Have the potential to transform the core in the long term: While it is too early to say definitively how much AWS will grow, both Bezos and Vogels have suggested that it will become as large as the core of the business10.  And while it plays in a different space than Amazon’s core business, given the potential for significantly higher margins, AWS has the potential to replace the core online retail business as the primary profit generator for the company. In addition to growing revenue, the move to services also represents a new approach for the company and a fundamental transformation of the company’s focus.  

Leverage—Edge initiatives should leverage low-cost, disruptive technologies, and external resources to overcome obstacles to scaling: Many of AWS’s services are designed to easily integrate with and build on other software and Web services. AWS’s fastest growing service, DynamoDB (a fast and scalable database service), was designed to seamlessly integrate with Elastic MapReduce (EMR), another Web service. EMR allows customers to analyze large quantities of data quickly and cost effectively. The two services in tandem are quite powerful. On his Weblog, Vogels described the interaction:

By taking advantage of DynamoDB’s seamless integration with EMR, many of our publishing customers are able to easily analyze various trends in real time, such as content popularity11.

As a result of the integrated design, a wide range of customers have quickly adopted the product because it meshes with tools they already use. This ease of adoption has driven rapid growth for DynamoDB. As Vogels describes:

After only two months, customers had already provisioned enough capacity to perform hundreds of billions of requests per day12.

One of the powerful elements of leverage is that AWS overcomes a zero-sum business mind-set. By creating products that interact with the existing ecosystem of online solutions, AWS is able to leverage the capabilities and products that have been established in the market. Additionally, Amazon fosters and creates online forums for new users who are just learning to use AWS tools. The result is that both products add value to each other and create a symbiotic relationship where companies and users both benefit.

Accelerate—The third key component to the framework is the speed at which one can take a new product to market. Compressing lead times and driving revenue quickly will allow the edge to overcome the financial and political obstacles that are the downfall of most strategic and change initiatives. Examples of these obstacles range from the explicit, such as choosing not to allocate budget to an initiative, to the passive, such as agreeing to an action item and then not following through. Edge initiatives should accelerate the pace of innovation to compress the time between investment and return wherever possible. Part of this process is to design for scalability and rapid testing and release. AWS itself was built to be quickly scalable with a portfolio of integrated products that were released as they were completed; this approach allowed Amazon to quickly test both the concept of moving into services as well as each individual application concurrently, and to make adjustments in real time to meet market demands.

Scaling edges in the context of the Big Shift
In order for the edge vision to have the most impact, it has to be in line with fundamental shifts in the broader marketplace. We have seen rapid gains in technological performance, digital infrastructure penetration, and global liberalization of economic policy, and all of these macro shifts are fundamentally changing the way consumers interact with organizations. Any change initiatives that do not take these trends into consideration will have a reduced chance of long-term success.

These concepts are built for change agents to help others in their companies develop the courage and conviction required to start the change process. Often, companies will have a vision for where their company and industry need to head (conviction), but lack the courage to act on that vision. At the same time, much of the financial and political resistance to change comes from the core of the business. This is to be expected; core processes are designed for the status quo. Deploying an edge model requires some change agents to detach from promising core activities to build on the periphery where there is less resistance, particularly in the initial phases when momentum is still building. Operating on the periphery is particularly important, as efforts that challenge the core directly tend to mobilize institutional “antibodies” that cause these efforts to fail.

As Amazon continues to scale the edge of AWS, it has the potential to not only transform the core of its own business, but to also fundamentally change its market and ecosystem. When companies, particularly those that are growing, begin to adopt cloud-based services, there will be a profound impact on how business is conducted. By providing cheap, scalable services, products like AWS enable companies to focus on core competencies, new or existing. Also, as data storage and processing needs become variable rather than fixed costs with cloud, companies will be able to more efficiently provide current product and service offerings with less risk and a litany of new services will follow suit. Amazon will have the opportunity to create new uniform standards and protocols for interactions across a series of products that have the opportunity to become new industry-wide standards. Amazon, as a result, will then have the chance to rally its ecosystem around its vision for the future of the technology industry.

 

8 Werner Vogels, “How and Why did Amazon get into the Cloud Computing Business,” Quora, September 10, 2010, http://www.quora.com/Amazon/How-and-why-did-Amazon-get-into-the-cloud-computing-business.

9 Ibid.

10 Larry Dignan, “Amazon CEO Jeff Bezos: Cloud services can be as big as retail business,” ZDNet, May 27, 2010, http://www.zdnet.com/blog/btl/amazon-ceo-jeff-bezos-cloud-services-can-be-as-big-as-retail-business/35111.
11 Werner Vogels, “Amazon DynamoDB—From the Super Bowl to WeatherBug,” All Things Distributed, June 21, 2012,  http://www.allthingsdistributed.com/2012/06/amazon-dynamodb-growth.html.
 12 Ibid.

As used in this document, “Deloitte” means Deloitte LLP [and its subsidiaries]. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting.

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