- Amazon is ramping up its number of warehouses, a move most likely signaling the introduction of same-day delivery.
- Best Buy has a new CEO. More generally speaking, Best Buy sucks.
So Amazon is betting big on this same-day delivery thing. Big enough that they’re going to invest in a ton of real estate capital, and give up the ability to skirt around sales taxes—one of their most significant cost advantages. (Arguably, the writing was on the wall for the sales tax thing anyway, and this is Amazon’s strategy to cope with that. But drawing out their strategic decision tree is not the point here.)
Here’s what’s interesting to me: Doesn’t Best Buy already have a robust network of warehouses across the globe? In fact, they’ve got roughly a thousand retail shops; I’m sure there are a bunch of store-supplying warehouses around as well. So why wouldn’t Best Buy roll out a delivery service of its own, and beat Amazon to the punch? Best Buy should be able to launch a delivery program (in select markets, at least) within a matter of weeks. The hard part is certainly not finding teenage employees clad with drivers licenses. Pizza joints have had this much figured out since man invented the wheel (and the pizza). I mean, forget same-day delivery: A pizza place can guarantee you a pie in 30 minutes or less—and they still have to cook stuff. So, Best Buy: How about same-hour delivery? There are two questions to consider:
- How much is first-mover advantage worth, exactly? Surely the corporate honchos have some precise way of quantifying this. If Best Buy rolls out first, how many customers switch from Amazon to Best Buy to make their next purchase? Perhaps even more importantly, what percentage of those customers stick around with Best Buy after Amazon catches up and enters the same-day delivery market? (You might frame the problem the other way around, too: How many Best Buy loyalists defect when Amazon introduces same-day delivery? How many come back when Best Buy catches up, if it doesn’t fold first?)
- What is the optimum competitive play? We’ve established that curating adequate real estate is the tricky part of the equation. We can’t say for sure if same-day delivery is a bona fide value proposition yet. We can probably illustrate this best with a payoff diagram. Here’s what I went with:
How to interpret:
- I’m assuming that whether the Same-Day Proposition is awesome or sucky is an independent variable. Whether the program is a hit or not is up to the public, out of the company’s control. (Realistically, you might assign probability weights to each, based on research and intuition. You might also argue that the likelihood of success can be influenced by proper advertising and promotion, etc. And you could certainly contend that this isn’t a black & white scenario; “pretty good,” and the like, are also possible outcomes.)
- The First Mover, in this scenario, is in Best Buy’s control, as outlined above. (A robust analysis might also include a bevy of other competitors. But whatever. Simplicity here.)
- The blue version shows Best Buy’s payoffs, and the beige version shows Amazon’s. So, for example, if the Same-Day Proposition is Awesome and Best Buy moves first, then Best Buy stands to gain $$$ and Amazon loses $$$. (These dollar figures are just very rough guesses, and could be debated ad infinitum.)
- In the scenario where Same-Day Proposition Sucks and the company was not the first mover, I’ve assumed a zero payoff—in other words, the company doesn’t enter the market. It’s possible that there might actually be a slight positive payoff as a result of the competitor’s negative PR, goodwill, what have you.
The critical cell, as far as game theory and competitive strategy go, is the bottom-right-most outcome under Amazon’s payoffs. That’s the result of Amazon’s heavy capital investments going bust. Which leads me to the following two thoughts:
- Eyeing that massively negative potential outcome, it’s possibly in Best Buy’s…err…best interests to stall on the development of its delivery program until Amazon starts sinking irredeemable capital into developing its warehouses. A scenario where Best Buy is a slight first mover might be its optimal choice, because then, even if Same-Day fails, Amazon is still stuck with big utility bills.
- If the likelihood of success is 50/50, then looking at Amazon’s payoffs above, the company may actually be better off not entering the market at all. Either way, Amazon’s expected payoff is (-$). Which probably means one or more of the following:
- Amazon’s got a pretty good hunch that this is going to succeed.
- I screwed up in drawing accurate payouts.
- As postulated way at the beginning, Amazon doesn’t really have a choice but to do this.