Jeff Bezos was one of the first to recognise the constructive power of the Internet. He realised that a new organisational form, the online store, could be constructed by linking existing businesses and customers through standardised electronic messages. He applied the principles of object-orientation (OO), the standard practice for building software, to create Amazon.
Key thoughts
- In a digital world, most of the objects for creating a new business exist.
- An entrepreneur connects objects using electronic messaging to create an organisation with a compelling value proposition.
- Established businesses can apply OO thinking to improve their Cʹ.
Amazon demonstrates the power of object-oriented thinking
Imagine a start-up with an initial investment of USD 1.6 million that, when launched, threatens the industry leader, a nationwide chain of 400 stores with annual sales of USD 2 billion. This scenario describes the emergence of Amazon in 1995 and its immediate impact on Barnes & Noble’s retail book business. It illustrates a discontinuity in strategy—a breakdown of many of the old rules of business and the emergence of a more productive form of enterprise design.
For a computer scientist, an object can send and receive standardised digital messages. Software is a collection of communicating objects, with each object performing a specialised function or coordinating the actions of other objects through messaging. The introduction of digital communication systems, such as the Internet and cell phone networks, gave people object-like characteristics. People are willing to send and receive digital messages.
Amazon’s initial online bookstore depended on customers (objects) sending digital messages to order and pay for books. It relied on another object, a book warehouse, to fulfil an order, and another object, a credit card company, to handle payments. The foundational core of Amazon is software to coordinate the actions of the connected objects.
Amazon's object-oriented design
Soon after Amazon appeared, I was trying to understand how it differed. Fortunately I am familiar with OO programming concepts, and one morning a neuron fired that connected Amazon’s structure with OO concepts. My good fortune continued, and I found a quote in Communications of the ACM, the foremost magazine for computer scientists, highlighting that OO design is a general principle that extends well beyond software development to the formation of massive organisations.
The goal of OO design is to identify accurately the principal roles in an organisation or process, assign responsibilities to each of these roles, and define the circumstances under which roles interact with one another.
The OO model spreads
Amazon’s success encouraged other OO designs. For example, in the UK, Betfair replaced bookmakers with a system for digitally connecting people who wanted to make and take bets. Whereas the traditional bookmaker took a cut of about 15% of a gambler’s wager, Betfair reduced its share to 5% of the winner’s take. In 2004, four years after launching its website, Betfair was the world’s largest betting exchange.
In 2001, John Deere implemented an OO design when it launched Frontier, the brand name for an extensive line of new equipment to complement John Deere’s products. Frontier products continue to appear in John Deere’s catalogue and on its dealers’ lots, but other firms manufacture them.
Netbank, a pioneering online bank in Atlanta, attracted depositors from across the United States, grew accounts by a compound 275 per annum from 1997 to 2000, and was profitable every quarter. Its value proposition, higher rates for depositors, was facilitated by the lower cost of online transactions (USD 0.13) compared to bank tellers (USD 1.08) or ATMs (USD 0.27).
An OO enterprise raises Cʹ by getting customers to work for free. The online book buyer does the work of a bookstore clerk. The online gambler does the job of a bookmaker by setting and taking odds. In addition, the OO organisation is not shackled by geography. Netbank attracted depositors from across the entire United States.
OO enterprises can grow rapidly because they are usually economic capital light. They have a limited geographic presence. There are no physical bookstores, betting shops, or banks in the cited examples. They invest primarily in organisational, social, and symbolic capital creation. Organisational capital, such as software and databases, is needed to operate the enterprise. The OO firm cultivates customers by creating social and symbolic capital. Netbank ran several unsuccessful campaigns to attract customers. It finally broke through when it advertised market-leading rates for certificates of deposits (CDs) on Yahoo!Finance. Symbolic capital usually takes a while to build. For an established company like John Deere, the new Frontier brand inherited its parent’s reputation and distinctive green color.
The OO pioneers had to build computer capacity to serve their growing customer base. Today’s OO start-ups can avoid this expense. The cloud is now available for database storage and software processing needs. Other objects exist for handling online ordering and logistics.
In creating an OO enterprise, it is essential to identify the competitive preserving actions the organisation should undertake. These are typically marketing to build social and symbolic capital, and software development to implement systems to differentiate service and the customer experience.
The Internet accelerated this growth by facilitating the emergence of OO enterprises using electronic messages to coordinate activity to deliver a new value proposition. The capital creation system continually grows because enterprises build on the existing capital infrastructure. Think of the capital creation system as a thriving forest that continually creates shady spots to nurture the growth of new enterprises.
Warren Buffett
CEO of Berkshire Hathaway
“Someone’s sitting in the shade today because someone planted a tree a long time ago. “
Critical reflections
- How OO is your organisation?
- Are there activities another object could more efficiently perform without jeopardising your competitiveness?
- How could you apply OO thinking to raise Cʹ?
- How do you become an object so other organisations seek your services?
