Networks of Expertise Deliver Superior Edge in Competitive Situations

Efficient Collaborative Networks Gain Superior Competitive Edge

In the scorching summer of 2002, Amazon's renowned CEO, Jeff Bezos, embarked on a vacation. Despite surviving the crushing dot-com crash of 2000, Amazon had grown at an unprecedented pace, yet Bezos felt unsatisfied. Despite his stern, authoritative tone, he had repeatedly vowed to foster an environment of decentralization and independent decision-making within Amazon, rather than implementing a top-down hierarchy.

By 2002, Bezos realized that decentralization was not delivering the intended results. Amazon remained a hierarchy, and like most hierarchies, it was slowing down. Despite orders to minimize communication, an excessive amount of time and energy was being spent on internal communication and coordination. Disappointed, Bezos lamented, "I'm still trying to get people to do what I ask occasionally."

Upon his return from vacation, Bezos presented a bold new idea to Amazon's executive team: Amazon would evolve into a network of autonomous, self-organizing teams. Initially, these teams would be small, resembling "two-pizza teams," but they would eventually grow into larger, "single-threaded teams." These teams would be tasked with solving Amazon's biggest challenges, and they would compete with one another, replicating the challenges of survival in nature. "This has to scale to infinity with no planned downtime," Bezos declared. "Infinity!"

Transforming Amazon into such a network was no simple feat and required years of diligent effort. Defined interfaces (APIs) were established between these autonomous teams to enable them to operate independently and communicate minimally. Only when the larger, single-threaded teams began to materialize beyond Amazon's retail operations, in sectors like cloud computing (AWS), did the full potential of this vision become apparent.

The outcomes were remarkable. Many of the usual drawbacks associated with big company growth were largely avoided.

Customers marvelled at the diversity, quality, efficiency, and reliability of the services, often finding them superior to those of competitors. Eventually, more than 5 billion retail deliveries took place annually.
Amazon's unparalleled customer data allowed it to focus its offerings on products and services that customers actually desired.
Exponential network effects were achieved as customers themselves spread the word.
Growth continued, with Amazon's 5-year total return surpassing that of the S&P 500 by an astonishing 1,556% within a decade.
The speed of Amazon's services improved steadily.
Operating costs consistently declined as competent people began to focus on creating value by doing less redundant work.
Processes were systematically redefined to align with the company's goals.
Staff engagement levels were generally high at the upper levels and in the knowledge work of the firm, despite being lower at lower levels.
Top management now had the tools to effectively steer the entire corporation.
Amazon grew dramatically, reaching a market capitalization of $2.4 trillion.

However, not everything at Amazon was a resounding success. The small "two-pizza teams" did not function as intended, and Amazon eventually shifted its focus to larger, single-threaded teams. Working conditions at lower levels, particularly in fulfillment centers, were often less than desirable, and Amazon invested heavily in facilities following the post-Covid period.

In conclusion, while Amazon has certainly faced challenges, the most significant have been the challenges of success.

Networks of Competence in Other Sectors

Amazon's groundbreaking approach to establishing a network of competence has now been adopted by many other sectors, including technology (AAPL, MSFT, GOOG), communications (META), retail (WMT), manufacturing (NVDA, TSLA. BYD), pharmaceuticals (LLY), entertainment (SPOT), cosmetics (ELF), private equity (KKR, EQBBF), and encyclopedias (Wikipedia).

The Transformation of Competitive Advantage

The conventional perspective on "competitive advantage" is that of a firm that achieves superiority in one or two dimensions, such as cost, customers, network effects, differentiation, focus, speed, innovation, control, staff fulfillment, or purpose. This perceived advantage was then seen as a static "moat" intended to shield the business from potential competitors.

In networks of competence, organizations begin to establish superiority in all, if not most, dimensions of competitive advantage. This superiority is not a transient advantage, but an ongoing one.

The very concept of competitive advantage has consequently been transformed from a static to a dynamic one. The only sustainable competitive advantage is now the continuous ability to innovate faster than competitors.

Critics' Objections to the Concept of Networks

'Networks Are Inherently Inefficient and Chaotic'

Critics object that networks are inherently inefficient and chaotic, and that they should be suppressed to prevent such a phenomenon from escalating. These critics frequently overlook the specific measures that firms like Amazon have employed to harness the inherent strengths of networks while mitigating their potential weaknesses.

Critics frequently highlight that no organization is strictly a network or a hierarchy. Even the most structured hierarchies exhibit network-like tendencies, particularly in Agile software development. Conversely, networks of expertise sometimes rely on hierarchies to establish themselves initially, only to risk dissolving back into hierarchies without ongoing hierarchical support.

‘Organizations Can Switch Between Networks And Hierarchies As Required’

This notion of switching is questionable. Most organizations lean towards being command structures or networks of competence. The unique behaviors associated with each mode become deeply ingrained in the organization's culture over time, making it difficult to shift them at will.

‘Networks Prosper Thanks To Technology’

Saying that networks thrive due to technology is much like claiming that networks are successful because they use electricity. All firms have access to this technology. The real question is whether they utilize it optimally and strategically. Networks first emerged in the tech sector, but now they're gaining traction in multiple industries.

‘The Success Of These Companies Is Due To First-Mover Advantage’

Google is often accused of benefiting from first-mover advantage, but in reality, it was the eighth company to launch a search service. Microsoft’s Bing, despite decades of effort, has never managed to catch up to Google Search. Google remains innovative, releasing around 90 significant innovations every quarter.

‘The So-Called Networks Are Remarkably Centralized’

Critics often cite instances of authoritarian language and behavior from leaders like Bezos and wonder, how could such a person not be leading a hierarchy? Critics overlook the decades of work by Bezos to foster a network, freeing him from the need to issue directives. By 2002, his dedication to self-governing teams became evident, and it was consistently implemented throughout Amazon.

“The Competition From Networks Is Unfair”

It is true that successful networks of competence present challenges for traditional command structures. Networks grow slower than average, have lower overall returns, rising costs of capital, and calls for leadership changes or company breakups become more frequent.

Smart command structures adapt to these shifts, leveraging examples like Amazon and Microsoft to guide their transformation. The primary question for command structures is if they're prepared to acknowledge that the world has evolved.

And also read:

*Understanding Why Networks Of Competence Dominate Command Structures*

*How Networks Of Competence Overpower Command Structures*

The transformation of Amazon into a network of autonomous teams was driven by the realization that decentralization was not delivering the intended results and that the company's hierarchy was slowing down the growth.
By fostering a network of competence, Amazon was able to achieve exponential network effects, grow at an unprecedented pace, and surpass the S&P 500's total return by an astonishing 1,556% within a decade.
The implementation of networks of competence in other sectors, such as technology, retail, manufacturing, and pharmaceuticals, has led to the transformation of competitive advantage from a static to a dynamic one, requiring continuous innovation to stay ahead of competitors.
Critics argue that networks are inherently inefficient and chaotic, but successful firms like Amazon have employed specific measures to harness their strengths while mitigating potential weaknesses, showing that networks can be a powerful source of competitive advantage if managed effectively.