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Gad Allon

Customer Care

Scaling Up: Lessons From Amazon’s Growth

Aligning timing, leadership, and strategy is complicated

Published: Wednesday, November 22, 2023 - 12:02

Amazon’s incredible growth over the years has made it a textbook example of what it means for a business to scale, going from a scrappy startup in Jeff Bezos’ garage to a multinational corporation with more than 1.5 million employees.

The retailer recently announced it’s hiring 250,000 full- and part-time workers for the holiday season. That’s 100,000 more workers than the company recruited last year and reflects a robust U.S. economy heading into the holidays, says Gad Allon, a Wharton professor of operations, information, and decisions.

“What’s the main idea here? Amazon knows this is really the time,” Allon says during an interview with Wharton Business Daily on SiriusXM. “If the economy is great and humming with low unemployment, and if you don’t have enough people, you might lose the opportunity.” (Listen to the podcast.)

Allon used Amazon as an example in his Wharton Executive Education class “Scaling Business for Profitable Growth,” where he examines the strategy, marketing, finance, and leadership it takes for firms to transition from modest to mighty. With decades of year-over-year growth in net sales revenue, Amazon makes scaling seem easy. But a deeper look shows just how complicated the process is for firms big and small, Allon says.

A key indicator of efficiency is how much a company spends on shipping, and Amazon’s shipping expenses have been rising.

Success depends on knowing how to read the tea leaves, so to speak: Firms must accurately predict changes in the economy and consumer behavior, then invest accordingly. The Covid-19 pandemic offers an excellent example of the degree of difficulty, Allon says. Some firms were able to pivot with the unprecedented change, while others struggled. Still others overinvested in a change that turned out to be temporary. He mentioned fintech startup Stripe, which in November 2022 laid off 14% of its workforce because it overhired during the pandemic-driven surge in e-commerce.

“Whenever you see an economic signal, you have to ask yourself, is this a new reality, good or bad? And does that mean we have to hire more people, or potentially slow down hiring, or even lay off people?” Allon says. “These are questions of scale of both people and infrastructure, and they are ongoing questions for most every firm that I know.”

As Amazon grows, so does inefficiency

Everything comes at a price, and that includes scaling up. Allon pointed out that Amazon’s impressive growth has corresponded with increased inefficiencies that the company is trying to resolve.

Initially, the retailer was highly centralized. But it decentralized to offer same-day and next-day delivery, requiring a significant increase in the number of workers and warehouse locations.

“There are now 90 metropolitan [areas] in the United States where you place an order and within 11 minutes it’s ready to be shipped,” Allon says. “Some of that is automation, but to a large extent this is very human-labor driven.”

‘Whenever you see an economic signal, you have to ask yourself, is this a new reality, good or bad?’
—Gad Allon

He notes that a key indicator of efficiency is how much a company spends on shipping, and Amazon’s shipping expenses have been rising.

“Their demand increased, their scale increased, but also their inefficiency increased,” Allon says.

The professor notes that one of the big challenges for Amazon CEO Andrew Jassy is the company’s “extremely inefficient” picking and packaging process. “It’s done by people, but even worse if it’s done by robots. Even the most successful robot at Amazon, the Sparrow, can only address 65% of Amazon SKUs,” says Allon.

For Amazon and other firms wanting to scale, technology will be a big component of their success. If robots remain expensive and unable to be integrated seamlessly into the process, firms are better off hiring more people to do the work. But with advances in generative AI and machine learning, Allon expects to see that change at some point in the future.

Overall, retail firms know that the holiday season is a make-or-break time, so scaling up in temporary workers is imperative. Consumers, in their scramble to buy gifts, have no compunction about abandoning one retailer for another that has the item in stock or can deliver it faster.

“These firms know that during the holiday season, there isn’t really an opportunity to make too many mistakes,” Allon says.

Published Nov. 6, 2023, on Knowledge at Wharton.


About The Author

Gad Allon’s picture

Gad Allon

Gad Allon is the Jeffrey A. Keswin Professor and Professor of Operations, Information and Decisions at the Wharton School, and the director of the Jerome Fisher Program in Management and Technology at the University of Pennsylvania.