Amazon’s announced partnership with Berkshire Hathaway and JPMorgan Chase is a clear signal that “The Everything Store” is serious about entering the healthcare space. The combination of best-in-breed brands in e-commerce, underwriting and consumer finance should be perceived as a bid to become a dominant player.
For healthcare incumbents, there is no more time for watching, waiting, or preserving the status quo. The barbarians are at the gate, and they’ll need to choose a stance.
Most will gravitate to one of three strategies: hide, merge, or fight. In corporate speak, they might call this focus on core competencies, vertical integration, or digital innovation. Organizations that use these buzzwords would be wise to study how retail incumbents fared deploying each of these strategies in their battles against Amazon over the past decade.
Borders told themselves that online and offline were completely separate channels, doubled down on their core competency of brick and mortar, and did not invest in online. As it turned out, while offline and online are completely different for the retailer, one can stand in for the other for the consumer. Borders declared bankruptcy in 2006, and ceased operations in 2011. Kmart and Sears took a different approach, teaming up against the common enemy. Scale, however, wasn’t why they were losing customers in the first place, and more scale doesn’t protect an inferior offering. Sears has lost 98% of its market capitalization since 2007.
The most successful incumbent is Walmart. It decided to fight fire with fire. But like other retailers, it started with a flawed strategy.
Walmart’s initial answer to Amazon was building an in-house digital team. This was an attempt to innovate by leveraging synergies with its existing operations and retrofitting its culture for a new world. This failed approach likely cost the company billions of dollars, and worse, nine years, before Walmart admitted it needed a new approach.
Why the perseverance in failure for nearly a decade? The in-house fallacy.
It is not yet in behavioral economics textbooks, but it appears to be an anthropological constant that leaders overvalue their hard-won experience, capabilities, and assets in the face of innovative disruption. Paradoxically, the attributes that make these companies impressive operators – process orientation, automation, error minimization – make them abysmal innovators.
For example, Walmart focused on leveraging its existing distribution system, which was optimized toward delivering truckloads of merchandise to their stores. At the same time, the real opportunity – which Amazon quickly mastered – was learning to pick and pack small orders and ship them direct to consumers. All too often, incumbents’ assets drag them down while new entrants are unencumbered by obsolete notions.
For Walmart, the story has taken a turn for the better. They ultimately shuttered their home-grown web team and acquired digital native Jet.com. Notably, they’ve gone to great lengths to preserve Jet’s most valuable assets: its culture, speed, and agility. Since the $3 billion acquisition in 2016, Walmart’s market cap has risen by $100 billion.
So, should incumbents in all industries follow this example? Not necessarily. Acquisitions have a high failure rate, and frequently don’t deliver the strategic value they promise. However, Walmart was running out of options and time. It ignored the sunk cost fallacy, pivoted quickly, and executed admirably on their plan B. As a result, Walmart is well positioned to stay in the ring and compete with Amazon.
I have worked in both healthcare and technology, observing decades of health giants over-promising on innovation, but under-delivering time and again. Incumbents can learn critical lessons from Walmart’s playbook. Here are three simple principles to guide them:
- Meet on their turf, not yours: it is a critical mistake to assume that regulatory barriers, scale, or vertical integration keeps technology at bay. Look no further than hotels versus Airbnb, taxis versus Uber, or Kmart versus Amazon. Sure, a merger can buy you time. But ultimately, you have to meet your customer where they are, and that’s increasingly online — the digital battlefield.
- Best-of-breed, not ownership: The Amazon coalition itself is the best example of resisting the in-house fallacy, and instead harnessing the expertise of specialized standouts. In my conversations with healthcare executives about digital strategies, too often they point to an in-house team providing a good-enough solution. Online, when infinite options are just a click away, there is no such thing as good enough. Over time, consumers will gravitate to the best solution, and there is no second place. The right response is to team up with a player that’s best-of-breed.
- Scale over margins: Amazon’s success is in large part due to its willingness to accept razor-thin margins in exchange for market share. This is terrible news for businesses that are addicted to operating in high-margin environments. The good news is that technology loves scale – the more technology-enabled your business is, the better this strategy will work.
Consumers should look forward to Amazon entering healthcare. Nearly certainly, it’ll lead to lower prices and more convenience.
But in healthcare, more than other industries, choice can be a matter of life and death, and a single dominant player would be a terrible outcome for patients. Let’s hope the healthcare incumbents learn the lessons of their retail brethren: those who act fast will have a fighting chance to stave off threats from the Amazon coalition. If they play it right, they should have every chance to compete successfully. Patients are counting on it.