The question of why e-commerce giant Amazon so successfully pushed the boundaries of delivery—running its own superfast “one-day” shipping service, offering same-day delivery to a vast network of third-party merchants, growing its Whole Foods shopping experience to the point that customers do nearly all their grocery shopping online—has fascinated economists for decades. They’ve largely speculated that Amazon’s size and number of customers uniquely lent itself to what’s been called “the agglomeration effect,” in which big corporations gain leverage with suppliers and contractors by virtue of the sheer numbers of workers they employ.
This theory also made sense in the pre-Amazon world of brick-and-mortar retailers: If you were a store, and your sales went up by 1% annually, and your average employee cost went up by 1%, then you could either increase your sales at the expense of your average employee, or cut your average employee costs. Unfortunately, Amazon’s enormous scale appears to have made it much more likely to cut employee costs than to raise them. Amazon’s dominant share of the US e-commerce market gives it enormous leverage over the logistics providers that contract with Amazon to get products to customer’s doors. This is a powerful weapon when big companies are locked in a bureaucratic game of cat-and-mouse over payments, but it’s also a hugely expensive weapon when giant companies are competing for the same supply-chain contracts.
But there is a countervailing theory to the “agglomeration effect,” advanced by academics Grant Barnett and Matthew Turck of the University of Utah, which argues that Amazon’s size is really a function of its innovation. Big companies simply lack the ability to create new, new, new things as fast as small ones. It’s what economists call the disruptive power that enables Amazon to acquire retailers and disrupt the entire brick-and-mortar retail industry. This theory is only true for innovators, not only small ones. As a huge corporation, Amazon has a massive network of resources, people, and money—and the ability to disrupt the entire supply chain of another company, or shift its focus toward one industry, or one way of doing things.
Consider Alphabet, Google’s parent company. It’s a huge juggernaut in its own right—with a market cap well north of $1 trillion—and its strategy, as one might expect, is to use its vast resources to invent new ways of doing things, all the while emerging as the world’s most valuable company, someday. Is that a reasonable strategy for any company, however big or small? Barnett and Turck’s answer to that question is yes, as long as you’re an innovator. Large companies (even incumbents) with hundreds or thousands of people are much less likely to develop new things than they were, in the mid-2000s, before the technology or financial bubbles burst. That puts them in a much more vulnerable position to disruption by new innovators, whose financial resources (and the possibly unshakeable dominance of Amazon and other juggernauts) give them a turbocharged ability to come up with new products and services. As a consumer, you will almost certainly find that you’re much better off when you can buy Amazon’s (or Google’s or Microsoft’s or Wal-Mart’s) stuff online.
There’s an important caveat to that statement, however: There’s often an inevitable trade-off between innovation and disruption. Some small companies will likely starve. Some incumbents, caught in the crossfire, may even fail outright. Even Microsoft’s Steve Ballmer, in an interview last year, admitted that his company had failed to innovate in hardware in his time as CEO, and had to start over from scratch. The risk in all of this is that with companies of different sizes and sizes, it becomes impossible to distinguish the innovations that actually lead to significant new products from the countless other clever bits of modern corporate thinking.
Amazon might be uniquely willing to take on the risk of a company’s failure or bankruptcy, but it’s impossible to know how many big corporations might be willing to take that same risk. It’s a risky calculus that has to be undertaken by every big company, even the mega-goliaths.