Should Your Business Buy or Develop Analytics Capability? A look through the lens of the Amazon-Whole Foods deal

“It’s our recognition that if you go to bed as an industrial company, you’re going to wake up as a software company,” declared Jeffrey Immelt, Chairman and CEO of General Electric (GE) at a Gartner conference back in 2015. He was trying to note that companies should seek to disrupt themselves, making a nod to his own, GE.

Well, he certainly did not imagine making a nod to Amazon, but that comment is so apt given what Amazon did with its bid on  Whole Foods Markets.

Amazon’s acquisition of Whole Foods Markets represents an unprecedented technological investment in the grocery retail industry.  The milestone also signals an unprecedented moment for analytics being seen as a catalyst for long-term business value.

Whole Food Markets Chicago
This Whole Foods Market in Chicago is bustling with customers. The Amazon acquisition promises to help the chain refine its customer relationship through analytics.
A look at an industry and its margins

Grocers like Krogers and Safeway have sold food items and associated services with thin profit margins.  This meant goods would have to be sold at high volume for a grocery chain to be profitable.

When Whole Foods Market started, however, it developed and maintained a margin advantage over other grocery chains through its focus on offering organic foods.  Organic foods command higher prices; thus a high product margin is possible.  Whole Foods Market established a strategic advantage with its organic food focus.  In fact Whole Foods Market is the first grocer to certify its food as organic according to the Wikipedia page on the company.

In recent years, Wal-Mart and Target have begun to offer grocery, increasing competition against traditional grocery chains.  But the most striking tactic has been to offer organic foods alongside those .  Wal-Mart and other low-cost grocers drawing customers seeking bargains away from Whole Foods.

The plan has worked.  Whole Foods reported six quarters of declining sales as a result. Moreover, Whole Foods gained a consumer nick-name “Whole Paycheck”   that references the price concerns people have about its produce.

How Analytics Becomes Essential To Business Growth
Enter Amazon and its potential to give Whole Foods a leg up.

Amazon has a number of analytic solutions that benefit Amazon Web Services (AWS), a set of cloud and services for databases and hosting.  These cloud services have been geared towards either supporting Amazon services or for specific needs of the tech community.  But with the Whole Food acquisition, Amazon has an opportunity to demonstrate tangent value to a industry that consumers and Wall Street analysts naturally understand.  Consumers can see more personalized marketing, which will boost sales.

An effort to provide more value may even challenge that consumer nick-name “Whole Paycheck” nickname.

The Amazon-Whole Food deal creates a transformation for a retail business model: a retailer that has been regularly limited by margins suddenly can determine where to focus on growing customer experience and ultimately retain customers.  It can do so through applied machine learning.  A simple concept behind machine learning is applying computation software to a dataset and providing meaningful results such as personalized service for customers.  A complimentary predictive analytics model can be built to adjust operational support for that personalization service.  Ultimately Amazon can leverage discoveries from machine learning initiatives into meaningful customer and business value.

This scenario is an analytical environment that can benefit Whole Foods against fierce competitors like Target and Wal-Mart, which are already using analytic initiatives of their own.

Decide whether to build software or acquire another company’s 

The decision to acquire a company is no small feat – Amazon’s all-cash acquisition is its largest to date.   But this news places a strategy spotlight on the value of analytics.

Amazon’s growth, albeit with debate about its scale at its start, reflects a trend that scaling a business profitably is part of business growth.  Business leaders are beginning to understand analytics can become a factor for unlocking long term value.  More importantly, they are putting that understanding into action.

The growing appreciation also raises the question – should a business look to acquire a business with analytics capability or should it develop its own in-house analytic services? This dilemma is a significant twist from a classic business question – to develop in-house capability or to integrate another company capabilities that has been honed and refined.

So should companies build software as a response to competitive pressure, or should they acquire it?  There is no panacea for an answer.

Many business owners believe business growth means increasing in physical size.  But doing so increases the demand for capital, and can start a never-ending spiral to induce volume sales.

Analytics can provide the right approach to scale, a variation on Immelt’s thought regarding self-disruption.  But it can take a large costly and timely effort to implement the right solutions.

But no matter what choice managers make, companies have to analyze their strategic activity and determine how to best create solutions that customers appreciate.

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