Category Archives: Systems

Complex adaptive systems, forecasting systems, systems design, systems architecture, modules, modular systems, modular design, system design patterns, forecasting systems that mine big data

Microbiome Apps Personalize EAT recommendations

Richard Sprague provides a useful update about the microbiome landscape below. Microbiome is exploding. Your gut can be measured, and your gut can influence your health and well-being. But now …. these gut measurements can offer people a first: personalized nutrition information.

Among the more relevant points:

– Israel’s Weitzman Institute is the global leader academically. Eran Elinav, a physician and immunologist at the Weizmann Institute and one of their lead investigators (see prior post).
– The older technology for measuring the gut is called “16S” sequencing. It tell you at a high level which kinds of microbes are present. It’s cheap and easy, but 16S can see only broad categories,
– The companies competing to measure your microbiome are uBiome, American Gut, Thryve, DayTwo and Viome. DayTwo and Viome offer more advanced technology (see below).
– The latest technology seems to be “metagenomic sequencing”. It is better because it is more specific and detailed.
– By combining “metagenomic sequencing” information with extensive research about how certain species interact with particular foods, machine-learning algorithms can recommend what you should eat.
– DayTwo offers a metagenomic sequencing for $299, and then combines that with all available research to offer personalized nutrition information.
– DayTwo recently completed a $12 million financing round from, among others, Mayo Clinic, which announced it would be validating the research in the U.S.
– DayTwo draws its academic understandings from Israel’s Weitzman Institute. The app is based on more than five years of highly cited research showing, for example, that while people on average respond similarly to white bread versus whole grain sourdough bread, the differences between individuals can be huge: what’s good for one specific person may be bad for another.

CREDIT: Article on Microbiome Advances

When a Double-Chocolate Brownie is Better for You Than Quinoa

A $299 microbiome test from DayTwo turns up some counterintuitive dietary advice.

Why do certain diets work well for some people but not others? Although several genetic tests try to answer that question and might help you craft ideal nutrition plans, your DNA reveals only part of the picture. A new generation of tests from DayTwo and Viome offer diet advice based on a more complete view: they look at your microbiome, the invisible world of bacteria that help you metabolize food, and, unlike your DNA, change constantly throughout your life.
These bugs are involved in the synthesis of vitamins and other compounds in food, and they even play a role in the digestion of gluten. Artificial sweeteners may not contain calories, but they do modify the bacteria in your gut, which may explain why some people continue to gain weight on diet soda. Everyone’s microbiome is different.

So how well do these new tests work?
Basic microbiome tests, long available from uBiome, American Gut, Thryve, and others, based on older “16S” sequencing, can tell you at a high level which kinds of microbes are present. It’s cheap and easy, but 16S can see only broad categories, the bacterial equivalent of, say, canines versus felines. But just as your life might depend on knowing the difference between a wolf and a Chihuahua, your body’s reaction to food often depends on distinctions that can be known only at the species level. The difference between a “good” microbe and a pathogen can be a single DNA base pair.

New tests use more precise “metagenomic” sequencing that can make those distinctions. And by combining that information with extensive research about how those species interact with particular foods, machine-learning algorithms can recommend what you should eat. (Disclosure: I am a former “citizen scientist in residence” at uBiome. But I have no current relationship with any of these companies; I’m just an enthusiast about the microbiome.)

I recently tested myself with DayTwo ($299) to see what it would recommend for me, and I was pleased that the advice was not always the standard “eat more vegetables” that you’ll get from other products claiming to help you eat healthily. DayTwo’s advice is much more specific and often refreshingly counterintuitive. It’s based on more than five years of highly cited research at Israel’s Weizmann Institute, showing, for example, that while people on average respond similarly to white bread versus whole grain sourdough bread, the differences between individuals can be huge: what’s good for one specific person may be bad for another.

In my case, whole grain breads all rate C-. French toast with challah bread: A.

The DayTwo test was pretty straightforward: you collect what comes out of your, ahem, gut, which involves mailing a sample from your time on the toilet. Unlike the other tests, which can analyze the DNA found in just a tiny swab from a stain on a piece of toilet paper, DayTwo requires more like a tablespoon. The extra amount is needed for DayTwo’s more comprehensive metagenomics sequencing.

Since you can get a microbiome test from other companies for under $100, does the additional metagenomic information from DayTwo justify its much higher price? Generally, I found the answer is yes.

About two months after I sent my sample, my iPhone lit up with my results in a handy app that gave me a personalized rating for most common foods, graded from A+ to C-. In my case, whole grain breads all rate C-. Slightly better are pasta and oatmeal, each ranked C+. Even “healthy” quinoa — a favorite of gluten-free diets — was a mere B-. Why? DayTwo’s algorithm can’t say precisely, but among the hundreds of thousands of gut microbe and meal combinations it was trained on, it finds that my microbiome doesn’t work well with these grains. They make my blood sugar rise too high.

So what kinds of bread are good for me? How about a butter croissant (B+) or cheese ravioli (A-)? The ultimate bread winner for me: French toast with challah bread (A). These recommendations are very different from the one-size-fits-all advice from the U.S. Department of Agriculture or the American Diabetes Association.

I was also pleased to learn that a Starbucks double chocolate brownie is an A- for me, while a 100-calorie pack of Snyder’s of Hanover pretzels gets a C-. That might go against general diet advice, but an algorithm determined that the thousands of bacterial species inside me tend to metabolize fatty foods in a way that results in healthier blood sugar levels than what I get from high-carb foods. Of course, that’s advice just for me; your mileage may vary.

Although the research behind DayTwo has been well-reviewed for more than five years, the app is new to the U.S., so the built-in food suggestions often seem skewed toward Middle Eastern eaters, perhaps the Israeli subjects who formed the original research cohort. That might explain why the app’s suggestions for me include lamb souvlaki with yogurt garlic dip for dinner (A+) and lamb kabob and a side of lentils (A) for lunch. They sound delicious, but to many American ears they might not have the ring of “pork ribs” or “ribeye steak,” which have the same A+ rating. Incidentally, DayTwo recently completed a $12 million financing round from, among others, Mayo Clinic, which announced it would be validating the research in the U.S., so I expect the menu to expand with more familiar fare.

Fortunately you’re not limited to the built-in menu choices. The app includes a “build a meal” function that lets you enter combinations of foods from a large database that includes packaged items from Trader Joe’s and Whole Foods.

There is much more to the product, such as a graphical rendering of where my microbiome fits on the spectrum of the rest of the population that eats a particular food. Since the microbiome changes constantly, this will help me see what is different when I do a retest and when I try Viome and other tests.

I’ve had my DayTwo results for only a few weeks, so it’s too soon to know what happens if I take the app’s advice over the long term. Thankfully I’m in good health and reasonably fit, but for now I’ll be eating more strawberries (A+) and blackberries (A-), and fewer apples (B-) and bananas (C+). And overall I’m looking forward to a future where each of us will insist on personalized nutritional information. We all have unique microbiomes, and an app like DayTwo lets us finally eat that way too.

Richard Sprague is a technology executive and quantified-self enthusiast who has worked at Apple, Microsoft, and other tech companies. He is now the U.S. CEO of an AI healthcare startup, Airdoc.

====================APPENDIX: Older Posts about the microbiome =========

Microbiome Update
CREDIT: https://www.wsj.com/articles/how-disrupting-your-guts-rhythm-affects-your-health-1488164400?mod=e2tw A healthy community of microbes in the gut maintains regular daily cycles of activities. A healthy community of microbes in the gut maintains regular daily cycles of activities.PHOTO: WEIZMANN INSTITUTE By LARRY M. GREENBERG Updated Feb. 27, 2017 3:33 p.m. ET 4 COMMENTS New research is helping to unravel the mystery of how […]

Vibrant Health measures microbiome

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Microbiome Update
My last research on this subject was in August, 2014. I looked at both microbiomes and proteomics. Today, the New York Times published a very comprehensive update on microbiome research: Link to New York Time Microbiome Article Here is the article itself: = = = = = = = ARTICLE BEGINS HERE = = = […]

Microbiomes
Science is advancing on microbiomes in the gut. The key to food is fiber, and the key to best fiber is long fibers, like cellulose, uncooked or slightly sauteed (cooking shortens fiber length). The best vegetable, in the view of Jeff Leach, is a leek. Eating Well Article on Microbiome = = = = = […]

Arivale Launches LABS company
“Arivale” Launched and Moving Fast. They launched last month. They have 19 people in the Company and a 107 person pilot – but their plans are way more ambitious than that. Moreover: “The founders said they couldn’t envision Arivale launching even two or three years ago.” Read on …. This is an important development: the […]

Precision Wellness at Mt Sinai
My Sinai announcement Mount Sinai to Establish Precision Wellness Center to Advance Personalized Healthcare Mount Sinai Health System Launches Telehealth Initiatives Joshua Harris, co-Founder of Apollo Global Management, and his wife, Marjorie has made a $5 million gift to the Icahn School of Medicine at Mount Sinai to establish the Harris Center for Precision Wellness. […]

Proteomics
“Systems biology…is about putting together rather than taking apart, integration rather than reduction. It requires that we develop ways of thinking about integration that are as rigorous as our reductionist programmes, but different….It means changing our philosophy, in the full sense of the term” (Denis Noble).[5] Proteomics From Wikipedia, the free encyclopedia For the journal […]

Marketing Automation Software

Pardot believes they are perfecting lead generation through supplemental technologies.

See Pardot Website

Salesforce.com believes in the idea enough to buy them.

At a high level, this is about accepting that most leads are not “hot”, Pardot offers a way to nurture all warm leads and monitor whether they are moving toward cold or hot. If hot, the Pardot nurtures tha relationship in a way most relevant to the lead. They call this Smarter lead generation and effortless email marketing.

My friend Andrew M is a Salesforce expert and swears by them.

World’s biggest battery installation

JAMESTOWN, Australia—Tesla Inc. Chief Executive Elon Musk may have overpromised on production of the company’s latest electric car, but he is delivering on his audacious Australian battery bet.

An enormous Tesla-built battery system—storing electricity from a new wind farm and capable of supplying 30,000 homes for more than an hour—will be powered up over the coming days, the government of South Australia state said Thursday. Final tests are set to be followed by a street party that Mr. Musk, founder of both Tesla and rocket maker Space Exploration Technologies Corp., or SpaceX, was expected to attend.

Success would fulfill the risky pledge Mr. Musk made in March, to deliver a working system in “100 days from contract signature or it is free.” He was answering a Twitter challenge from Australian IT billionaire and environmentalist Mike Cannon-Brookes to help fix electricity problems in South Australia—which relies heavily on renewable energy—after crippling summer blackouts left 1.7 million people without power, some for weeks.

Mr. Cannon-Brookes then brokered talks between Mr. Musk and Australian Prime Minister Malcolm Turnbull, who has faced criticism from climate groups for winding back renewable-energy policies in favor of coal. South Australia notwithstanding, the country’s per-person greenhouse emissions are among the world’s highest.

South Australia’s government has yet to say how much the battery will cost taxpayers, although renewable-energy experts estimate it at US$50 million. Tesla says the system’s 100-megawatt capacity makes it the world’s largest, tripling the previous record array at Mira Loma in Ontario, Calif., also built by Tesla and U.S. power company Edison.

Quantified Water Movement (QWM)

Think FITBITS for water. The Quantified Water Movement (QWM) is here to stay, with devices that make real-time monitoring of water quality in streams, rivers, lakes and oceans for less than $1,000 per device.

The Stroud Water Research Center in Pennsylvania is leading the way, along with other center of excellence around the world. Stroud has been leading the way on water for fifty years. It is an elite water quality study organization, renowned for its globally relevant science and scientist excellence. Find out more at www.stroudcenter.org.

As a part of this global leadership in the study of water quality, Stroud is advancing the applied technologies that comprise the “quantified water movement” – the real-time monitoring of water quality in streams, rivers, lakes and oceans.

QWM is very much like the “quantified self movement”(see Post on QSM. QSM takes full advantage of low cost sensor and communication technology to “quantify my self”. In other words, I can dramatically advance my understanding about my own personal well-being win areas like exercise, sleep, glucose levels in blood, etc This movement already has proven that real-time reporting on metrics is possible at a very low cost, and on a one-person-at-a-time scale. Apple Watch and FITBIT are examples of commercial products arising out of QSM.

In the same way, QWM takes full advantage of sensors and communication technology to provide real-time reporting on water quality for a given stream, lake, river, or ocean. While still in a formative stage. QWM uses the well-known advances in sensor, big data, and data mining technology to monitor water quality on a real-time basis. Best of all, this applied technology has now reached an affordable price point.

For less than $1,000 per device, it is now possible to fully monitor any body of water, and to report out the findings in a comprehensive dataset. Many leaders believe that less than $100 is possible very soon.

The applied technology ends up being a simple “data logger” coupled with a simple radio transmitter.

Examples of easy-to-measure metrics are:

1. water depth
2. conductivity (measures saltiness or salinity)
3. dissolved oxygen (supports fish and beneficial bacteria)
4. turbidity (a sign of runoff from erosion. Cloudy water actually abrades fish, and prevent fish from finding food)

Training now exists, thanks to Stroud, that is super simple. For example, in one hour, you can learn the capability of this low cost equipment, and the science as to why it is important.

In a two day training, citizen scientists and civil engineers alike can learn how to program their own data logger, attach sensors to the data logger, and deploy and maintain the equipment in an aquatic environment.

All of this and more is illuminated at www.enviroDIY.org.

Amazon Crush Sept 2017 Edition

===Amazon Crush Sept 2017 Edition===

Amazon now has the world’s attention. It just landed the cover story of The Economist, printed in its entirety below (together with a YouTube video and a Bloomberg article cited below).

A quick scan of this blog reminds me that I began tracking Amazon in early 2014 with multiple posts, copied here.

I speculated in EARLY 2014 (see post below) that Amazon revenue in 2015 would exceed $100 billion. They finished 2015 at $107 billion – up $11 billion vs 2014. I forecast $130 billion in 2016. They closed at $136 billion. Look at this remarkable growth curve!

2016
136 billion
2015
107,010
2014
88,988
2013
74,452
2012
61,093
2011
48,077
2010
34,204

The old forecast that Amazon will exceed $250 billion in sales by 2020 is looking about right. People are now saying Amazon is headed to $500 billion. I believe them.

Salient points from the article below:

The former bookseller accounts for more than half of every new dollar spent online in America.
Since the beginning of 2015 its share price has jumped by 173%, seven times quicker than in the two previous years (and 12 times faster than the S&P 500 index).
With a market capitalisation of some $400bn, it is the fifth-most-valuable firm in the world.
Last year cashflow (before investment) was $16bn, more than quadruple the level five years ago.
It continues to struggle with grocery, and yet Amazon is moving aggressively to learn from their mistakes. Their purchase of Whole Foods signals their learning that many consumers want to touch their groceries before buying, and they frequently enjoy the buying experience. A recent article in

==================ECONOMIST ARTICLE=========

CREDIT: https://www.economist.com/news/leaders/21719487-amazon-has-potential-meet-expectations-investors-success-will-bring-big

CREDIT: https://www.youtube.com/watch?v=H0UH1TxjcEA

Corporate ambitions
Amazon, the world’s most remarkable firm, is just getting started
Amazon has the potential to meet the expectations of investors. But success will bring a big problem

Mar 25th 2017

AMAZON is an extraordinary company. The former bookseller accounts for more than half of every new dollar spent online in America. It is the world’s leading provider of cloud computing. This year Amazon will probably spend twice as much on television as HBO, a cable channel. Its own-brand physical products include batteries, almonds, suits and speakers linked to a virtual voice-activated assistant that can control, among other things, your lamps and sprinkler.
Yet Amazon’s shareholders are working on the premise that it is just getting started. Since the beginning of 2015 its share price has jumped by 173%, seven times quicker than in the two previous years (and 12 times faster than the S&P 500 index). With a market capitalisation of some $400bn, it is the fifth-most-valuable firm in the world. Never before has a company been worth so much for so long while making so little money: 92% of its value is due to profits expected after 2020.

That is because investors anticipate both an extraordinary rise in revenue, from sales of $136bn last year to half a trillion over the next decade, and a jump in profits. The hopes invested in it imply that it will probably become more profitable than any other firm in America. Ground for scepticism does not come much more fertile than this: Amazon will have to grow faster than almost any big company in modern history to justify its valuation. Can it possibly do so?
It is easy to tick off some of the pitfalls. Rivals will not stand still. Microsoft has cloud-computing ambitions; Walmart already has revenues nudging $500bn and is beefing up online. If anything happened to Jeff Bezos, Amazon’s founder and boss, the gap would be exceptionally hard to fill. But the striking thing about the company is how much of a chance it has of achieving such unprecedented goals (see article).
A new sort of basket-case
This is largely due to the firm’s unusual approach to two dimensions of corporate life. The first of these is time. In an era when executives routinely whine about pressure to produce short-term results, Amazon is resolutely focused on the distant horizon. Mr Bezos emphasizes continual investment to propel its two principal businesses, e-commerce and Amazon Web Services (AWS), its cloud-computing arm.
In e-commerce, the more shoppers Amazon lures, the more retailers and manufacturers want to sell their goods on Amazon. That gives Amazon more cash for new services—such as two-hour shipping and streaming video and music—which entice more shoppers. Similarly, the more customers use AWS, the more Amazon can invest in new services, which attract more customers. A third virtuous circle is starting to whirl around Alexa, the firm’s voice-activated assistant: as developers build services for Alexa, it becomes more useful to consumers, giving developers reason to create yet more services.
So long as shareholders retain their faith in this model, Amazon’s heady valuation resembles a self-fulfilling prophecy. The company will be able to keep spending, and its spending will keep making it more powerful. Their faith is sustained by Amazon’s record. It has had its failures—its attempt to make a smartphone was a debacle. But the business is starting to crank out cash. Last year cashflow (before investment) was $16bn, more than quadruple the level five years ago.
If Amazon’s approach to time-frames is unusual, so too is the sheer breadth of its activities. The company’s list of current and possible competitors, as described in its annual filings, includes logistics firms, search engines, social networks, food manufacturers and producers of “physical, digital and interactive media of all types”. A wingspan this large is more reminiscent of a conglomerate than a retailer, which makes Amazon’s share price seem even more bloated: stockmarkets typically apply a “conglomerate discount” to reflect their inefficiencies.
Many of these services support Amazon’s own expansion and that of other companies. The obvious example is AWS, which powers Amazon’s operations as well as those of other firms. But Amazon also rents warehouse space to other sellers. It is building a $1.5bn air-freight hub in Kentucky. It is testing technology in stores to let consumers skip the cash register altogether, and experimenting with drone deliveries to the home. Such tools could presumably serve other customers, too. Some think that Amazon could become a new kind of utility: one that provides the infrastructure of commerce, from computing power to payments to logistics.
A giant cannot hide
And here lies the real problem with the expectations surrounding Amazon. If it gets anywhere close to fulfilling them, it will attract the attention of regulators. For now, Amazon is unlikely to trigger antitrust action. It is not yet the biggest retailer in America, its most mature market. America’s antitrust enforcers look mainly at a firm’s effect on consumers and pricing. Seen through this lens, Amazon appears pristine. Consumers applaud it; it is the most well-regarded company in America, according to a Harris poll. (AWS is a boon to startups, too.)
But as it grows, so will concerns about its power. Even on standard antitrust grounds, that may pose a problem: if it makes as much money as investors hope, a rough calculation suggests its earnings could be worth the equivalent of 25% of the combined profits of listed Western retail and media firms. But regulators are also changing the way they think about technology. In Europe, Google stands accused of using its clout as a search engine to extend its power to adjacent businesses. The comparative immunity from legal liability of digital platforms—for the posting of inflammatory content on Facebook, say, or the vetting of drivers on Uber—is being chipped away.
Amazon’s business model will also encourage regulators to think differently. Investors value Amazon’s growth over profits; that makes predatory pricing more tempting. In future, firms could increasingly depend on tools provided by their biggest rival. If Amazon does become a utility for commerce, the calls will grow for it to be regulated as one. Shareholders are right to believe in Amazon’s potential. But success will bring it into conflict with an even stronger beast: government.
This article appeared in the Leaders section of the print edition under the headline “Amazon’s empire”

===Amazon Crush Apr 2017 Edition===

Incredible 18 months for Amazon, but the new phrase is “retail apocalypse”.

Financial Times Article on Amazon

For all prior Amazon Updates, see 11/2016 Update

====Amazon Crush March 2017 Edition ===
CREDIT: https://www.bloomberg.com/news/features/2017-03-20/inside-amazon-s-battle-to-break-into-the-800-billion-grocery-market

Inside Amazon’s Battle to Break Into the $800 Billion Grocery Market

After almost a decade of food retail experiments with little success online, the e-commerce giant is embracing the physical stores it once shunned.

By Spencer Soper and Olivia Zaleski
March 20, 2017, 6:00 AM EDT

“Very wasteful” isn’t a phrase usually associated with Amazon.com Inc., which is so cost-conscious it once removed the light bulbs from its cafeteria’s vending machines. But after spending several months analyzing the online retailer’s grocery-shipping hubs back in 2014, that’s exactly how a mechanical engineering student described its approach to selling bananas.
Workers at Amazon Fresh, the company’s grocery-delivery business, threw away about a third of the bananas it purchased because the service only sold the fruit in bunches of five, the student concluded. Employees trimmed each bunch down to size and chucked the excess.

The research paper by Vrajesh Modi, who now works for Boston Consulting Group, highlighted other problems: Poorly trained employees often stood around with nothing to do. Moldy strawberries were frequently returned by disappointed customers. Amazon’s inspectors believed their corporate bosses didn’t care much about the quality of the food.
Such challenges linger for Amazon. Despite several attempts to break into the $800 billion grocery industry and almost a decade in the business, the company has struggled to entice shoppers en masse to buy eggs, steaks and berries online the same way they’ve flocked to buy books, tablets and toys.
“Online grocery is failing,” said Kurt Jetta, chief executive officer of TABS Analytics, a consumer products research firm. Only 4.5 percent of shoppers made frequent online grocery purchases in 2016, up just slightly from 4.2 percent four years earlier despite big investments from companies such as Amazon, according to the firm’s annual surveys. “There’s just not a lot of demand there. The whole premise is that you’re saving people a trip to the store, but people actually like going to the store to buy groceries.”
Amazon CEO Jeff Bezos now seems to understand that he can’t win the grocery game with websites, warehouses and trucks alone. The world’s biggest online retailer sees brick-and-mortar stores playing a key role in a renewed grocery push, documents reviewed by Bloomberg show. And like it did with Amazon Fresh, the company is launching its newest projects in Seattle, its home town.

Last Tuesday, men in cherry pickers worked through driving rain to affix “Amazon Fresh” signs to a drive-in grocery location in Seattle’s Ballard neighborhood, where shoppers can stop and have online orders loaded into their cars. Crews were busy on a similar site south of downtown, readying canopies over parking spaces to protect customers from the elements as they pick up their shopping bags. The secretive company has yet to announce the projects, and crews have covered the Amazon signs in black fabric and paper.
Late last year, Amazon purchased supply-chain software from LLamasoft Inc.– a major departure for a company known for its logistics prowess, and defying an internal mantra of “we don’t buy, we build.” And it more recently restructured how various grocery teams were managed to narrow their focus and set clear priorities, according to people familiar with the company’s business.
These changes come as Amazon breaks from its standard formula of shipping products in boxes out of jam-packed warehouses. Instead, it will invite shoppers inside its own grocery stores to smell the oranges, see the tomatoes and tap the watermelons. Ahead of a national rollout next year, Amazon is testing three brick-and-mortar grocery formats in Seattle — convenience stores called Amazon Go, the drive-in grocery kiosks, and a hybrid supermarket that mixes the best of online and in-store shopping. The company may open as many as 2,000 stores, according to internal documents.

The company has said little about its grocery-store plans, aside from a video about Amazon Go’s no-checkout format that has racked up more than 8.7 million views on YouTube. An Amazon spokeswoman declined to comment for this story. Reports on its moves have dribbled out over the past several months, prompting occasional denials and retorts from the company. Seattle technology site Geekwire in August uncovered Amazon’s mysterious drive-in grocery kiosk in Ballard. The New York Post in February said Amazon aimed to create “robot-run supermarkets” that would operate with only a few people. Bezos responded by tweeting to the Post: “Whoever your anonymous sources are on this story — they’ve mixed up their meds!”
Amazon’s goal is to become a Top 5 grocery retailer by 2025, according to a person familiar with the matter. That would require more than $30 billion in annual food and beverage spending through its sites, up from $8.7 billion — including Amazon Fresh and all other food and drink sales — in 2016, according to Cowen & Co. 
Reaching that milestone would require a new wave of store and warehouse investments around the country, costing billions of dollars. That’s an existential change for Amazon, which initially stayed away from perishable goods and has mostly avoided the overhead of physical stores since it started in 1994.

“A bunch of smart people at Amazon have been thinking about re-imagining the next phase of physical retail,” said Scott Jacobson, a former Amazon executive who is now a managing director at Madrona Venture Group. “They want more share of the wallet, and habitual, frequent use of Amazon for groceries is the ultimate goal.”
For Amazon shoppers interested in buying groceries online, the company’s current offerings can be confusing. Amazon Fresh is available in about 20 U.S. cities for those paying $14.99 a month. Amazon Pantry lets shoppers buy crackers, cookies, chips, coffee and other non-perishables for a delivery fee of $5.99 per box. Amazon’s speedy drop-off service, Prime Now, offers items from local grocers in some cities, but no major chains. Its stick-on Dash Buttons let people order many household products — including some groceries, but not fresh food — with a finger tap. And Subscribe & Save offers discounts to Amazon customers who sign up for periodic delivery of laundry detergent, toothpaste, diapers, paper towels and other items frequently purchased in grocery stores.
The various initiatives have been a source of increasing internal tension as employees on different projects compete to sell the same things, according to a person familiar with the matter.
One problem saddling Amazon Fresh is the high cost of losses caused by food going bad, an issue it’s never faced with books and toys. For conventional grocery sellers, browning bananas can be sold at a discount to smoothie-makers and bread bakers. Chicken breasts nearing their expiration dates can be marked down. With Amazon Fresh, such items must be discarded or are returned by frustrated customers, according to a person familiar with the matter. That has meant Amazon Fresh has lost money from spoilage at more than double the rate for a typical supermarket, said the person, who asked not to be identified discussing internal operations. The main reason Amazon began delivering groceries through Prime Now was to hand that risk back to the local grocers to lower Amazon’s costs. The company didn’t originally anticipate the scope or difficulty of these problems because so few people working on its grocery push have experience in the industry.
“Grocery is the most alluring and treacherous category,” said Nadia Shouraboura, a former Amazon executive whose company, Hointer, has been working on redefining in-store grocery shopping for the past 18 months. “It lures inventors and retailers with shopping volume and frequency, and then sinks them with low margin.”
Beyond grocery, Amazon executives have also discussed opening consumer electronics stores to showcase its gadgets and better compete with Best Buy Co., according to three people familiar with the plan. For years, Amazon executives have discussed the downside of an online-only strategy, mostly with regard to a lack of places for shoppers to try out Kindle electronic readers, the voice-activated Echo speaker and its defunct Fire smartphone. Amazon considered holding events similar to Tupperware parties when it introduced its first Kindle in 2007, fearing the products would languish unseen, Jacobson said. The handful of bookstores Amazon has opened around the country double as gadget showrooms, similar to the Apple Store.
Long term, a stronger grocery business could position Amazon to become a wholesale food-distribution business serving supermarkets, convenience stores, restaurants, hotels, hospitals and schools. But first the company has to find a way to get more people to think of Amazon when stocking their refrigerators and pantries.

Photographer: David Ryder/Bloomberg
A group of Amazon executives met late last year to discuss the disadvantage Amazon faced compared with grocery competitors such as Wal-Mart and Kroger because of its lack of physical stores and customer apprehension about buying fresh foods online. They decided they needed something more to jump-start Amazon’s grocery push beyond plans already under way for the Amazon Go convenience store, modeled for urban areas, and drive-in grocery pick-up stations suited for the suburbs.
They worked out plans for a third approach: grocery stores closer in size to a Trader Joe’s than a Wal-Mart to offer easy access to milk, eggs and produce.  Other items like paper towels, cereal, canned goods and dish detergent would be stocked on-site in a warehouse where they could be easily packed and delivered to shoppers at the location, according to documents reviewed by Bloomberg. It would also serve as a delivery hub for online orders.
Brittain Ladd, a supply chain consultant who joined Amazon in 2015 and most recently worked on its Amazon Fresh and Pantry expansions, wrote about such a store prior to joining Amazon in an academic paper called “A Beautiful Way to Save Woolworths.”

Ladd envisioned two-story buildings where shoppers browse produce, bread and other fresh items on the ground level while their orders for paper towels, canned goods and cereal are packed in a warehouse above. “The stores will have the capability to fulfill online orders placed by customers within a specific radius of the store,” he wrote. “Amazon drivers and/or contractors will be assigned to deliver groceries.”
The executives decided such a store would be worth pursuing for Amazon Fresh and ordered further research about ideal locations, how to integrate the stores with grocery delivery, and the use of automation to reduce overhead. Site selection for this store’s first model is happening now in Seattle, according to a person familiar with the plan.
Meanwhile, the first wave of its new grocery experiment, Amazon Go, was unveiled in December and for now is only open to employees while the systems are tested. Cameras and sensors monitor shoppers who scan their smartphones upon entering, allowing them to grab items like sandwiches, yogurt, drinks and snacks and automatically pay for them without a checkout kiosk. Products are embedded with tracking devices that pair with customers’ phones to charge their accounts. Weight-sensitive shelves tell Amazon when to restock. A patent filed by Amazon in 2014 suggests it could use facial-recognition technology to identify and then automatically charge in-store shoppers.
In its video touting Amazon Go, the company said it was aiming to open the site to the public in “early 2017,” and it hasn’t provided an update to that timing. But the technology has been crashing in tests when the store gets too crowded and requires human quality control, people watching video images to make sure customers are charged for the right things, according to a person familiar with the plan.
Beyond letting customers skip lines, the technology gives Amazon valuable data, said Guru Hariharan, founder of Boomerang Commerce Inc., which designs software for large retailers. Even if customers don’t purchase everything they touch, there’s value in understanding what shoppers consider but don’t ultimately buy, he said. That makes it worthwhile for Amazon to work through the kinks in the technology.
“It takes a lot of time and experimentation to work through unpredictable scenarios like a child picking up an item or a person wearing sunglasses or a face muffler,” he said.
At the same time, recent work and construction permits indicate the new drive-in grocery kiosk in Ballard could open any day.

===Amazon Crush Nov 2016 Edition===

I began tracking Amazon in early 2014 with multiple posts, copied here.

I speculated in EARLY 2014 (see post below) that Amazon revenue in 2015 would exceed $100 billion.

They finished 2015 at $107 billion – up $11 billion vs 2014:

2015
107,010
2014
88,988
2013
74,452
2012
61,093
2011
48,077
2010
34,204

Revenue is up 21% for the first 9 months of 2016. So my bet is that 2016 will be about $130 billion. The old forecast that Amazon will exceed $250 billion in sales by 2020 is looking about right.

Cash for the latest 12 months is way up – they have $13 billion on hand in cash and cash equivalents.

Their stock price is at an all-time high: $767.

Reminders of earlier posts about moves by Amazon:

ECHO: The Echo is a stout, plain-looking cylinder, about the height of a toaster, that you can park just about anywhere you have Wi-Fi access, though it seems most useful in the kitchen. You can ask it anything, beginning with the word “ALEXA….”

TWITCH: video streaming …. has 40% of all internet video streaming bandwidth????

AMAZONFRESH: lets customers purchase groceries online, including perishable items like dairy, meat, and fish, which are delivered within a day.

They tested in Seattle for years, and then rolled out in 2014 to most of California, New Jersey, New York City, Philadelphia, and Washington. They then took an 18 month expansion hiatus. They will expand to Boston and UK this year. This is slower than expected.

As for its progression into other markets, there are more hurdles associated with AmazonFresh than the site’s other services that have slowed it down—the company needs to open refrigerated warehouses, carry its own stock of perishable groceries, and hire additional delivery people in each new market.

 
Word is that it’s difficult to convince customers it’s worth the $299/year price tag. Amazon is trying to grab a larger share of the grocery market with this expansion. Delivery currently makes up less than 5% of all grocery sales.

Here is how their 2015 10K describes their business.

General
Amazon.com opened its virtual doors on the World Wide Web in July 1995. We seek to be Earth’s most customer-centric company. We are guided by four principles: customer obsession rather than competitor focus, passion for invention, commitment to operational excellence, and long-term thinking. In each of our segments, we serve our primary customer sets, consisting of consumers, sellers, developers, enterprises, and content creators. In addition, we provide services, such as advertising services and co-branded credit card agreements.

Beginning in the first quarter of 2015, we changed our reportable segments to North America, International, and Amazon Web Services (“AWS”). These segments reflect the way the Company evaluates its business performance and manages its operations. Additional information on our operating segments and product information is contained in Item 8 of Part II, “Financial Statements and Supplementary Data—Note 11—Segment Information.” See Item 7 of Part II, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—Supplemental Information” for supplemental information about our net sales. Our company-sponsored research and development expense is set forth within “Technology and content” in Item 8 of Part II, “Financial Statements and Supplementary Data—Consolidated Statements of Operations.”
Consumers
We serve consumers through our retail websites and focus on selection, price, and convenience. We design our websites to enable millions of unique products to be sold by us and by third parties across dozens of product categories. Customers access our websites directly and through our mobile websites and apps. We also manufacture and sell electronic devices, including Kindle e-readers, Fire tablets, Fire TVs, and Echo. We strive to offer our customers the lowest prices possible through low everyday product pricing and shipping offers, and to improve our operating efficiencies so that we can continue to lower prices for our customers. We also provide easy-to-use functionality, fast and reliable fulfillment, and timely customer service. In addition, we offer Amazon Prime, an annual membership program that includes unlimited free shipping on millions of items, access to unlimited instant streaming of thousands of movies and TV episodes, and other benefits.
We fulfill customer orders in a number of ways, including through: North America and International fulfillment and delivery networks that we operate; co-sourced and outsourced arrangements in certain countries; and digital delivery. We operate customer service centers globally, which are supplemented by co-sourced arrangements. See Item 2 of Part I, “Properties.”

Sellers
We offer programs that enable sellers to sell their products on our websites and their own branded websites and to fulfill orders through us. We are not the seller of record in these transactions, but instead earn fixed fees, a percentage of sales, per-unit activity fees, or some combination thereof.

Here are prior posts:
=========
JUNE, 2015 POST on ECHO

Amazon’s Echo
See NYT article below on Amazon’s Echo (and note comparisons to other voice command systems, such as Siri, Google Now, and Cortana):

“If it moves nimbly, keeping ahead of Apple and Google, Amazon could transform the Echo into a something like a residential hub, the one device to control pretty much everything attached to your home.”

Functionality at the moment is:

– telling you the weather
– playing music you ask for
– adding stuff to your shopping list
– reordering items you frequently buy from Amazon
– giving you a heads-up about your nearing calendar appointments
– setting a kitchen timer
– answering the most basic of search queries

Amazon Echo, a.k.a. Alexa, Is a Personal Aide in Need of Schooling
By FARHAD MANJOOJUNE 24, 2015

The Amazon Echo, a wireless speaker and artificially intelligent personal assistant, can tell you the weather, play music and reorder items you frequently buy from Amazon, among other things.

THIS week, I asked a friend for help: “Alexa, can you write this review for me?”
“What’s your question?” Alexa responded.
“Can you write this review for me?”
“Review is spelled R-E-V-I-E-W.”
“Thanks,” I said. “That about sums it up.”

O.K., so Alexa isn’t perfect; far from it, in fact. If there is one glaring flaw in the Amazon Echo — the tiny wireless speaker and artificially intelligent personal assistant, a machine that one always addresses with the honorific “Alexa,” as if she’s some kind of digital monarch — it is that she is quite stupid.

If Alexa were a human assistant, you’d fire her, if not have her committed. “Sorry, I didn’t understand the question I heard” is her favorite response, though honestly she really doesn’t sound very sorry. She’ll resort to that line whether you ask her questions answered by a simple Google search (“How much does a cup of flour weigh?”) or something more complicated (“Alexa, what was that Martin Scorsese movie with Joe Pesci and Robert De Niro?”).

Other times, she is mind-numbingly literal. One night during the N.B.A. playoffs, I asked, “Alexa, what’s the score of the basketball game?” She proceeded to give me a two-minute, 18-part definition of the word “score” that included “a seduction culminating in sexual intercourse.” Not exactly what I was going for.

And yet, after spending three weeks testing the Echo, I really kind of love Alexa. She is just smart enough to be useful. And she keeps getting smarter. This week, after a long invitation-only preview period, Amazon began selling the Echo to the public. At $179.99, Alexa is more expensive than I’d like. (Subscribers to Amazon’s $99-a-year Prime subscription service could buy the Echo for only $100 during the preview.) But if you’re the type who enjoys taking chances on early, halfway useful tech novelties, the Echo is a fun thing to try.

And if you’re anything like me, after a week with the Echo, you may feel the device begin to change how you think about home tech. It will not seem far-fetched to expect that one day soon, you’ll have an all-knowing, all-seeing talking assistant to control your lights, thermostat, entertainment system and just about anything else at home. In Alexa, Amazon has created the perfect interface to control your home; if it adds some more intelligence, it would be quite handy.

The Echo is a stout, plain-looking cylinder, about the height of a toaster, that you can park just about anywhere you have Wi-Fi access, though it seems most useful in the kitchen. It comes with a remote control that you don’t really need, because after a quick initial setup using your smartphone, you can control pretty much everything the Echo does with your voice. (The remote does have a microphone that allows you to speak to the Echo from far away.) From there, the Echo is terrifically easy to use — say “Alexa” and ask your question.

At the moment, there are only a handful of uses for the Echo. She’s great at telling you the weather, adding stuff to your shopping list, reordering items you frequently buy from Amazon, giving you a heads-up about your nearing calendar appointments, and answering the most basic of search queries.

She is pretty good at playing music, though her main source is Amazon Prime Music, a streaming service that is included with a Prime membership. Prime Music’s selection is dreadfully limited, though, and at the moment, the Echo can’t connect to many other streaming services. Thankfully, with a few quick voice commands, Alexa can connect to your phone like any other Bluetooth speaker. That way, she can take control of music you play from most apps, including streaming apps like Spotify. You can’t call out for specific songs this way, but you can say “Alexa, pause” or “Alexa, next” and she’ll control the tunes playing from your phone.

The Echo is also a very good kitchen timer. Put your cookies in the oven; yell out, “Alexa, set timer for 12 minutes”; and she’s off. It’s far easier than fumbling with buttons on the microwave, especially when you have your hands full.

But wait a minute — can’t you do pretty much all this on your phone, your smartwatch or many other devices? Yes, you can, but Alexa is right there. She’s always plugged in. She’s always listening, and she’s fast. It’s surprising how much of a difference a few milliseconds make in maintaining the illusion of intelligence in our machines. Because Alexa is far quicker to spring into action than Siri, Apple’s digital personal assistant, especially Siri on the Apple Watch, I found her to be much more pleasant to use, even if she is frequently wrong.

Amazon says that it plans to constantly improve the Echo. During the preview period, it added a host of new features, including the ability to control some smart-home devices, built-in integration with the Pandora streaming service, and traffic information for your morning commute. I’m hoping Amazon creates an open system — what developers call an API — for the Echo, which will allow a wide variety of online services and apps to connect to the device. If it moves nimbly, keeping ahead of Apple and Google, Amazon could transform the Echo into a something like a residential hub, the one device to control pretty much everything attached to your home.

At the moment, that dream is far off. But dumb as she sometimes sounds, Alexa may be just smart enough to make it happen.

This entry was posted in Personalization, Systems, Technology and tagged Amazon, Echo, Technology, voice recognition on June 29, 2015.

========= MAY 2015 POST ============

The Amazon Crush continues:

Just look at cash:

CASH AND CASH EQUIVALENTS, END OF PERIOD
2014
14.557 billion
2013
8,.658 billion
2012
8.084 billion

Amazon has published its 10Q for Q1 2015

http://phx.corporate-ir.net/phoenix.zhtml?c=97664&p=irol-reportsother

Note that free cash flow has doubled:

“Free cash flow, a non-GAAP financial measure, was $3.2 billion for the trailing twelve months ended March 31, 2015, compared to $1.5 billion for the trailing twelve months ended March 31, 2014.”

Note also that international revenue is down.

They also have published their annual report:
http://phx.corporate-ir.net/phoenix.zhtml?c=97664&p=irol-reportsannual

Net sales are continuing sharp growth – to $89 billion.
2014
88,988
2013
74,452
2012
61,093
2011
48,077
2010
34,204

Sales increased 20%, 22%, and 27% in 2014, 2013, and 2012

, compared to the comparable prior year periods. Changes in foreign currency exchange rates impacted net sales by $(636) million, $(1.3) billion, and $(854) million for 2014, 2013, and 2012. For a discussion of the effect on sales growth of foreign exchange rates, see “Effect of Foreign Exchange Rates” below.

North America sales increased 25%, 28%, and 30% in 2014, 2013, and 2012

, compared to the comparable prior year periods. The sales growth in each year primarily reflects increased unit sales, including sales by marketplace sellers, and AWS, which was partially offset by AWS pricing changes. Increased unit sales were driven largely by our continued efforts to reduce prices for our customers, including from our shipping offers, by sales in faster growing categories such as electronics and other general merchandise, by increased in-stock inventory availability, and by increased selection of product offerings.

nternational sales increased 12%, 14%, and 23% in 2014, 2013, and 2012

, compared to the comparable prior year periods. The sales growth in each year primarily reflects increased unit sales, including sales by marketplace sellers. Increased unit sales were driven largely by our continued efforts to reduce prices for our customers, including from our shipping offers, by sales in faster growing categories such as electronics and other general merchandise, by increased in-stock inventory availability, and by increased selection of product offerings. Additionally, changes in foreign currency exchange rates impacted International net sales by $(580) million, $(1.3) billion, and $(853) million in 2014, 2013, and 2012. “

In their annual report, they state the key to their cash flow business model:

“Because of our model we are able to turn our inventory quickly and have a cash-generating operating cycle3. On average, our high inventory velocity means we generally collect from consumers before our payments to suppliers come due.”

https://openforum.hbs.org/challenge/understand-digital-transformation-of-business/business-model/amazonfresh-well-positioned-to-capture-value-in-online-grocery

====================== Posted 20140820: Amazon Crush – Update =====
Amazon Crush – Update

Amazon update
Thanks to Oliver Wyman, Fast Company and many others for this update on last post on Amazon…..my sense from reading all:
– Twitch is Amazing! Driving 40% of all internet bandwidth???? Is that even possible? With 55 million users spending an average of 100+ minutes per day??? That is enormous! Bezos obviously intrigued and willing to take a risk to get this three-year old start-up in its fold? But why exactly? Don’t know
– FRESH is moving out. Per plan, and announcement to stockholders and also per rumor, Amazon Fresh is in a soft launch mode. The big news was the launch in LA (after 7 years in Seattle tweaking), and then it was small news that they rounded out most of the the rest of California markets – that is a HUGE expansion in less than a year. Moreover, Amazon green trucks are riding through Manhattan, and a roll there is imminent. No word yet, but I really think Chicago might be next – rumors say I am right.
– Manufacturers think this isn’t their fight. Most of them are just glad they are not retailers. But the truth is that Amazon will cause a massive reduction in retailer margin, as well as many of the brand-building activities at retail that manufacturers are used to …. horrible merchandising will replace great merchandising, forget about cold beverage sales, forget about impulse sales, etc.
– the truth is that retail is not at risk – just the marginally profitable ones.

Here are the articles:

AMAZONFRESH IN THE U.S.
After years of anticipation, AmazonFresh has now expanded its U.S. home grocery delivery service beyond its home market of Seattle.
In June 2013, it launched in Los Angeles, with more markets expected to follow. From conversations with supermarket retailers all over the U.S. and globally, it is clear that online and multi-channel competitors have come into focus as a key competitive threat, and AmazonFresh is by far the most dangerous of the new breed. What is striking is the similarity between what we hear from food retailers today and what leaders of category killers were saying back in 2009 – and we know that the category killers’ fears of Amazon proved to be well-founded.

WHAT IS AMAZON FRESH?
AmazonFresh, operating in pilot mode in Seattle since 2007, allows shopping online and on mobile apps. The assortment is surprisingly broad and deep, with between 10,000 and 30,000 items, depending on the market, including (for example) 400+ produce items, 500+ meat and seafood items, 1,300+ beverage items and 4,000+ health and beauty items. Unlike the traditional Amazon model, AmazonFresh prices on consumables are currently higher than those found in local supermarkets, as promotions are mostly absent – the current customer proposition focus is on convenience.
The differences between the Seattle and LA models (different membership and delivery pricing models and different assortment depth, to name a few) seem to indicate that Amazon is still trialling many elements of the business, but the rollout to additional markets suggests underlying confidence in the economics.
When Amazon decides to move from pilot to rollout, history indicates they will move very rapidly. The company has reportedly told vendors it could roll out to 40 U.S. markets by the end of 2014!
The direct impact that Amazon had on many category killers by winning market share is obvious, as is the impact on consumers’ price expectations, but one under-reported aspect of what is happening to category killers is the channel conflict competition Amazon provokes. Not only does Amazon take share, they also force category killers to shift transactions to their own websites. But those sites are not the basket-building machines that stores are. For one major category killer, the average online transaction has only a quarter of the number of items that the average in-store transaction has. So the incumbents face a conundrum – they must grow online sales, but doing so dramatically worsens their economics.
However, Amazon will never take as much share away from food retailers as it has taken from category killers. Food retailers’ natural defenses – low gross margins, focus on fresh product, “need it now” consumption patterns, the emotional aspect of personally selecting food to feed one’s family – mean the supermarket channel as a whole will not suffer the fate of Borders or even Best Buy.
The threat is not that stores will become obsolete; such notions are alarmist and naïve. But AmazonFresh can force dramatic change in the shape of the food retail industry with even modest market share. It doesn’t take complicated analysis to prove this. The industry overall runs with about a 2% bottom line and a 20% volume variable margin. This means
a 10% sales loss would wipe out the entire industry’s profit. Any experienced food retail executive knows that most chains have a “mushy middle” of stores that generate reasonable operating income with current sales volumes, but would quickly tip into negative store profit with a modest reduction in volume. We don’t know what Amazon’s ultimate ambitions in the food space are, but if they achieve even a 5% volume share it would force significant changes. Current players would have to either raise prices – kicking off the vicious cycle of volume loss, causing deleveraged fixed costs, leading to even more price rises – or close stores to bring costs into line. A 5% volume loss to AmazonFresh would result in 10-20% reduction in store count, because not all the volume from closed stores will be clawed back by surviving stores: as supermarkets become relatively less convenient, some of the volume would go to specialists (clubs, hard discounters, premium players) and online channels. It’s too early to know the full extent of the impact, but a good guess is that around one in eight supermarkets would have to close to maintain current profitability without raising prices.
Supermarkets should not count on their ability to weather this disruption the way they weathered the last major disruption: the Walmart supercenter tsunami, in the case of the U.S. Then, the best grocers got better, slashed cost out of their networks, improved their capabilities, and prospered at the expense of weaker competitors who couldn’t adapt fast enough. They had time to pull this off because Walmart couldn’t open a thousand supercenters overnight. But this time, the starting point is much, much more efficient – there will be a lot less “fat” to cut to preserve profitability in the face of falling volume – and the weaker players that were the victims last time are already gone. Most significantly, the rate of change in the competitive landscape will not be constrained by the process of opening new stores. Amazon only has to set up distribution centers and networks. It already has a strong consumer brand. This disruption could happen much faster than anything the industry has seen before.

WHAT SHOULD FOOD RETAILERS BE DOING? AT LEAST THREE THINGS:
Build a multi-channel offering. Of course, grocers must develop their own answer to online and mobile shopping. And it is better to cannibalize one’s own in-store sales than to surrender them to the competition. That said, it is very tricky to make the economics of these models work, so great care must be taken to manage the bottom line as online and mobile sales ramp up.
Get seriously good at fresh. The fresh categories represent a cushion around the rest of the customer offer. If customers believe they can’t get the same quality, freshness and selection online as they would in a store, it will be a formidable barrier to switching to on-line purchasing. So far AmazonFresh’s fresh product offering is highly variable (see Exhibit 1) but it stands to reason that they will get better with experience. And they have a built-in freshness advantage – as do all online grocers – because product take less time to go from the distribution center to the customer’s home. Most U.S. retailers are nowhere near where they could be, and the same is true in many other geographies. Getting good enough at fresh to fend off online competition means re-thinking the supply chain, store practices and merchandising standards. It means breaking the usual trade-off between availability and shrink, shifting the efficient frontier through better capabilities and greater accountability.
Prepare for a world with fewer stores. Possibly a lot fewer. Even an excellent multichannel platform and a rejuvenated fresh offer will not be nearly enough. We believe food retailers should be planning now for a world with far fewer stores. If, say, 15% of the square footage is going to have to close down, survival will depend on making sure the competition bears more than their fair share of the pain. So grocers’ competitive strategy should be focused on ensuring they get to keep more of their stores than the competition does, and being prepared to pounce when weakened competitors begin to wobble. This means understanding how to win store-by-store battles and drive maximum profit out of every square foot. To be clear, we are bullish on the supermarket industry. While the industry’s transformation will be painful for all and fatal for a few, the survivors will be better placed. Surviving stores will do much higher volume and, with higher fixed cost leverage, they could be massively more profitable. Stronger competition will force grocers to become even better operators and even more responsive to customer needs. Retailers who act fast can not only survive, but adapt their businesses to thrive in the new world.

Exhibit 1: PRELIMINARY CUSTOMER RESEARCH BY OLIVER WYMAN SHOWS a wide range of customer perceptions of the quality of AmazonFresh products
“The apples were the kind I would have hunted for and maybe not found. They looked great and the taste was fresh and sweet, the texture crisp which is exactly what I like. They were delicious.”
“The sell by date on the frozen beef says July 2013 [delivered in September 2013]. Granted it was frozen, this makes me believe it’s not fresh beef and I’m a little disappointed by that.”
“Some of the berries were very soft and leaking all over the box.”

ABOUT OLIVER WYMAN
Oliver Wyman is a global leader in management consulting that combines deep industry knowledge with specialized expertise in strategy, operations, risk management, and organization transformation.
Copyright © 2014 Oliver Wyman. All rights reserved.
FastCompany: AmazonFresh a “Trojan horse;” 20 more markets expected
Aug 11 2013, 18:15 ET
In a cover story on Jeff Bezos and Amazon (AMZN), FastCompany’s J.J. McCorvey observes the company’s new AmazonFresh grocery service (offered via its $299/year Prime Fresh free shipping plan) is a “Trojan horse” meant to give Amazon’s broader same-day delivery efforts needed scale.
Amazon is also hoping its same-day infrastructure (replete with Amazon trucks) will increase its appeal to 3rd-party sellers (now responsible for 40% of unit sales) by lowering delivery times. Merchants already cite access to Prime as a reason for outsourcing fulfillment to Amazon (and giving a ~20% cut).
EBAY could prove a formidable same-day rival. Instead of building its own soup-to-nuts infrastructure, eBay is relying on dozens of offline retailers (inc. major national chains) to help handle fulfillment. Google is also dipping its toes into same-day.
Currently available in L.A. and Seattle, AmazonFresh is expected to expand to 20 more markets, including some international ones. SunTrust recently predicted an NYC launch will happen in 2014.
Also mentioned by McCorvey: Amazon is now able to ship items less than 2.5 hours after an order is placed; and wants to further lower than number; Prime now covers 15M+ items (up from 1M in ’05); and Amazon is still “evaluating” how to use Kiva’s robots.
Amazon buying Twitch for $970M in cash

FAST COMPANY
4.2K SHARES
AMAZONFRESH IS JEFF BEZOS’ LAST MILE QUEST FOR TOTAL RETAIL DOMINATION
AMAZON UPENDED RETAIL, BUT CEO JEFF BEZOS — WHO JUST BOUGHT THE WASHINGTON POST FOR $250 MILLION — INSISTS IT’S STILL “DAY ONE.” WHAT COMES NEXT? A RELENTLESS PURSUIT OF CHEAPER GOODS AND FASTER SHIPPING. THE COMPETITION IS ALREADY GASPING FOR BREATH.
BY J.J. MCCORVEY
The first thing you notice about Jeff Bezos is how he strides into a room.
A surprisingly diminutive figure, clad in blue jeans and a blue pinstripe button-down, Bezos flings open the door with an audible whoosh and instantly commands the space with his explosive voice, boisterous manner, and a look of total confidence. “How are you?” he booms, in a way that makes it sound like both a question and a high-decibel announcement.

MORE ON AMAZON
• Amazon CEO Jeff Bezos Agrees To Buy The Washington Post For $250 Million
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• Think Your Office Is Soulless? Check Out This Amazon Fulfillment Center
Each of the dozen buildings on Amazon’s Seattle campus is named for a milestone in the company’s history–Wainwright, for instance, honors its first customer. Bezos and I meet in a six-floor structure known as Day One North. The name means far more than the fact that Amazon, like every company in the universe, opened on a certain date (in this case, it’s July 16, 1995). No, Day One is a central motivating idea for Bezos, who has been reminding the public since his first letter to shareholders in 1997 that we are only at Day One in the development of both the Internet and his ambitious retail enterprise. In one recent update for shareholders he went so far as to assert, with typical I-know-something-you-don’t flair, that “the alarm clock hasn’t even gone off yet.” So I ask Bezos: “What exactly does the rest of day one look like?” He pauses to think, then exclaims, “We’re still asleep at that!”
He’s a liar.
Amazon is a company that is anything but asleep. Amazon, in fact, is an eyes-wide-open army fighting–and winning–a battle that no one can map as well as its general. Yes, it is still the ruthless king of books–especially after Apple’s recent loss in a book price-fixing suit. But nearly two decades after its real day one, the e-commerce giant has evolved light-years from being just a book peddler. More than 209 million active customers rely on Amazon for everything from flat-panel TVs to dog food. Over the past five years, the retailer has snatched up its most sophisticated competition–shoe seller Zappos and Quidsi, parent of such sites as Diapers.com, Soap.com, Wag.com, and BeautyBar.com. It has purchased the robot maker Kiva Systems, because robots accelerate the speed at which Amazon can assemble customer orders, sometimes getting it down to 20 minutes from click to ship. Annual sales have quadrupled over the same period to a whopping $61 billion. Along the way, incidentally, Amazon also became the world’s most trusted company. Consumers voted it so in a recent Harris Poll, usurping the spot formerly held by Apple.
RELATED ARTICLE
• Retail’s Game Of Thrones: Citizens of these kingdoms know the stakes–you innovate or you die.
Amazon has done a lot more than become a stellar retailer. It has reinvented, disrupted, redefined, and renovated the global marketplace. Last year, e-commerce sales around the world surpassed $1 trillion for the first time; Amazon accounted for more than 5% of that volume. This seemingly inevitable shift has claimed plenty of victims, with more to come. Big-box retailers like Circuit City and Best Buy bore the brunt of Amazon’s digital assault, while shopping-mall mainstays such as Sears and JCPenney have also seen sales tank. Malls in general, which once seemed to offer some shelter from the online pummeling, have been hollowed out. By Green Street Advisors’ estimate, 10% of the country’s large malls will close in the next decade. It has become painfully clear that the chance to sift through bins of sweaters simply isn’t enough of a draw for shoppers anymore. “It has been this way in retail forever,” says Kevin Sterneckert, a research VP at Gartner who focuses on shopping trends, and who lays out a strategy that should blow nobody’s mind: “If you don’t innovate and address who your customers are, you become irrelevant.” And now that means fending off threats from every phone, tablet, and laptop on the planet.
Amazon’s increasing dominance is now less about what it sells than how it sells. And that portends a second wave of change that will further devastate competitors and transform retail again. It’s not just “1-Click Ordering” on Amazon’s mobile app, which is tailor-made for impulse buying. It’s not just the company’s “Subscribe & Save” feature, which lets customers schedule regular replenishments of essentials like toilet paper and deodorant. It’s not just Amazon’s “Lockers” program, in which huge metal cabinets are installed at 7-Elevens and Staples in select cities, letting customers securely pick up packages at their convenience instead of risking missed (or stolen) deliveries.

“AMAZONFRESH IS REALLY A TROJAN HORSE. IT’S NOT ABOUT WINNING IN GROCERY SERVICES. IT’S ABOUT DOMINATING THE MARKET IN SAME-DAY DELIVERIES. ”

No, it’s all this, plus something more primal: speed. Bezos has turned Amazon into an unprecedented speed demon that can give you anything you want. Right. Now. To best understand Amazon’s aggressive game plan–and its true ambitions–you need to begin with Amazon Prime, the company’s $79-per-year, second-day delivery program. “I think Amazon Prime is the best bargain in the history of shopping,” Bezos tells me, noting that the service now includes free shipping on more than 15 million items, up from the 1 million it launched with in 2005. Prime members also gain access to more than 40,000 streaming Instant Video programs and 300,000 free books in the Kindle Owners’ Lending Library. As annoying as this might be to Netflix, it is not intended primarily as an assault on that business. Rather, Bezos is willing to lose money on shipping and services in exchange for loyalty. Those 10 million Prime members (up from 5 million two years ago, according to Morningstar) are practically addicted to using Amazon. The average Prime member spends an astounding $1,224 a year on Amazon, which is $700 more than a regular user. Members’ purchases and membership fees make up more than a third of Amazon’s U.S. profit. And memberships are projected to rise 150%, to 25 million, by 2017.
Nadia Shouraboura of Hointer, a new store that represents how retail must adapt in the Age of Amazon

Robbie Schwietzer, VP of Prime, is more candid than his boss when explaining Prime’s true purpose: “Once you become a Prime member, your human nature takes over. You want to leverage your $79 as much as possible,” he says. “Not only do you buy more, but you buy in a broader set of categories. You discover all the selections we have that you otherwise wouldn’t have thought to look to Amazon for.” And what you buy at Amazon you won’t buy from your local retailer.
Prime is phase one in a three-tiered scheme that also involves expanding Amazon’s local fulfillment capabilities and a nascent program called AmazonFresh. Together, these pillars will remake consumers’ expectations about retail. Bezos seems to relish the coming changes. “In the old world, you could make a living by hoping that your customer didn’t know whether your price was actually competitive. That’s a very”–Bezos pauses for a second to rummage for the least insulting word–“tenuous strategy in the new world. [Now] you can’t convince people you have the low price; you actually have to have the low price. You can’t persuade people that your delivery speeds are fast; you actually have to have fast delivery speeds!” With that last challenge, he erupts in a thunderous laugh, throwing his cleanly depilated head so far back that you can see the dark fillings on his upper molars. He really does seem to know something the rest of us don’t. We’re still asleep, he says? The alarm clock at Amazon went off hours ago. Whether the rest of the retail world has woken up yet is another question.
Amazon’s 1-million-square-foot Phoenix fulfillment center produces a steady and syncopated rhythm. It is the turn of mechanical conveyor belts, the thud of boxes hitting metal, the beeping of forklifts moving to and fro, and the hum of more than 100 industrial-size air conditioners whirring away. This is the sound of speed–a sonic representation of what it takes to serve millions of customers scattered across the globe.

In centers like this one, of which there are 89 globally (with more to come), Amazon has built the complex machinery to make sure a product will ship out in less than 2.5 hours from the time a customer clicks place your order.

From that click, a set of algorithms calculates the customer’s location, desired shipping speed, and product availability; it then dispatches the purchase request to “pickers” on duty at the nearest fulfillment center. The system directs the new order to the picker who is closest on the floor to that product, popping up with a bleep on the picker’s handheld scanner gun. These men and women roam the sea of product shelves with carts, guided by Amazon’s steady hand to the precise location of the product on the color-coded shelves. The picker gathers the item and puts it into a bin with other customer orders. And from there, the item zooms off on a conveyor belt to a boxing station, where a computer instructs a worker on what size box to grab and what items belong in that box. After the packer completes an order, the word success lights up in big green letters on a nearby computer screen. Then the package goes back on a conveyor, where the fastest delivery method is calculated by scanning the box, which is then kicked down a winding chute to the appropriate truck.
AMAZON-PROOF RETAIL
How one store merges digital and physical
If anyone can design a brick-and-mortar store for an e-commerce world, it should be Nadia Shouraboura. She used to be Amazon’s VP of global supply chain and fulfillment technology and has since created Hointer, a fully automated store run on software algorithms and machinery. She calls it a “microwarehouse” that marries digital’s instant gratification with in-store benefits. “In apparel, this will win,” she predicts. It works like this:
STEP 1. SEARCH
A customer enters the spare store, where there’s only one of every product in view. She pulls up the Hointer app, scans the QR code on a pair of jeans she likes, and enters her size.
STEP 2. DELIVER
Within 30 seconds of scanning the code, a pair of jeans in her size travels through a chute and lands in her dressing room. She can scan as many items as she likes.
STEP 3. REFINE
Inside the dressing room, she tries on the jeans, but they’re too baggy. So she chucks them down another chute and selects a smaller size from the app.
STEP 4. PURCHASE
The jeans fit! She pays on her phone or swipes her card at a kiosk, and leaves the store with her purchase. No sales clerk necessary.
The process is efficient, but still lower tech than it could be. Although Amazon shelled out $775 million last year for those orange Kiva robots, it says it’s still “evaluating” how to deploy the bots, and they’re nowhere to be seen here. “Fulfillment by Amazon” is still a very human endeavor–and the company’s creativity thrives within that limitation. A team at the Phoenix center is constantly thinking of ways to chip away at the 2.5-hour processing time. For instance, when products arrive from Amazon’s vendors and the 2 million third-party merchants who sell their goods on the site, workers now scan them into Amazon’s inventory system (again, with a handheld gun) instead of entering the details manually. Also, products have been stowed on shelves in what otherwise might appear to be a random way–for example, a single stuffed teddy bear might be next to a college biology book–because it reduces the potential distance a worker must trek between popular products that might be ordered together. Small tweaks like these have an impact: In the past two years, Amazon has reduced the time it took to move a product by a quarter. During the past holiday season, the company processed 306 items per second worldwide.
These centers aren’t just about warehouse speed, though: They’re also about proximity. Over the past several years, Bezos has poured billions into building them in areas closer and closer to customers. The Phoenix warehouse, one of four in the region, serves a metro area of nearly 4 million. Robbinsville, New Jersey, is roughly one hour from 8 million New Yorkers. Patterson, California, is an hour and a half from 7 million people living in the San Francisco Bay Area. Three locations in Texas–Coppell, Haslet, and Schertz–will serve not only the nearly 9 million citizens of the Dallas and San Antonio metro areas but also the other 17 million or so customers in the state (and possibly neighboring states too) who live only a few hundred miles away.
“What you see happening,” Bezos explains, “is that we can have inventory geographically near major urban populations. If we can be smart enough–and when I say ‘smart enough,’ I mean have the right technology, the right software systems, machine-learning tools–to position inventory in all the right places, over time, your items never get on an airplane. It’s lower cost, less fuel burned, and faster delivery.”
The holy grail of shipping–same-day delivery–is tantalizingly within reach. Amazon already offers that service in select cities, what it calls “local express” delivery, but the big trick is to do it nationally. And the crucial element of this ambitious plan is revealed by something wonkier than a bunch of buildings. It is something only an accountant could see coming: a cunning shift in tax strategy.
“”IN THE NEW DIGITAL WORLD,” SAYS BEZOS, “YOU CAN’T CONVINCE PEOPLE YOU HAVE THE LOW PRICE; YOU ACTUALLY HAVE TO HAVE THE LOW PRICE.””
If you were a competitor who knew what to listen for, you’d practically hear the Jaws theme every time Bezos said the word taxes. For years, Amazon fervently avoided establishing what is called a “tax nexus”–that is, a large-enough physical presence–in states that could potentially force it to collect sales tax from its customers, something brick-and-mortar and mom-and-pop stores had long argued would finally remove Amazon’s unfair pricing advantage. In states that dared to challenge Amazon, the company would quickly yank operations. The scrutiny even extended to its sale of products by other merchants. “We had to be very careful, even with the third-party business, about not incurring tax-nexus stuff,” recalls John Rossman, a former Amazon executive and current managing director at Alvarez and Marsal, a Seattle-based consulting firm.
But Amazon has since changed its mind. It determined that the benefits of more fulfillment centers–and all the speed they’ll provide–will outweigh the tax cost they’ll incur. So it began negotiating with states for tax incentives. South Carolina agreed to let the company slide without collecting sales tax until 2016, in exchange for bringing 2,000 jobs to the state. In California, Amazon was given a year to start collecting taxes in exchange for building three new warehouses. And at the end of 2011, Amazon even threw its support behind a federal bill that would mandate all online retailers with sales of more than $1 million to collect tax in states in which they sold to customers. In 2012 alone, Amazon spent $2.5 million lobbying for issues that included what’s known as the Marketplace Fairness Act–the same law, essentially, it had once moved heaven and earth to eradicate. The bill recently cleared the U.S. Senate and awaits passage in the House.
“The general perception is companies thinking, Oh, great, finally a level playing field,” Rossman says. “But other retailers are going to regret the day. Sales tax was one of the few things impeding Amazon from expanding. Now it’s like wherever Amazon wants to be, whatever Amazon wants to do, they are going to do it.”
There’s yet another weapon in Amazon’s offensive, and it’s ready for rollout. It’s called AmazonFresh, a grocery delivery service that has long been available only in Seattle. The site has a selection of 100,000 items, and from my hotel room in that city on a recent Saturday at 11 a.m., I gave it a try. I clicked on chips, bananas, apples, yogurt, and a case of bottled water–along with a DVD of Silver Linings Playbook and a Moleskine reporter’s notebook. After checking out and paying the $10 delivery fee, I requested my goods to arrive during the 7 p.m. to 8 p.m window. At 7:15 that evening, De, my AmazonFresh delivery woman, showed up in the lobby. She helped carry my bags up the elevator and to my hotel room, and tried several times to refuse a $5 tip for the trouble I put her through in the name of research. It was simple, easy–and for Amazon competitors, very threatening.
De and the Kiva robots are central to what Amazon sees as the future of shopping: whatever you want, whenever you want it, wherever you want it, as fast as you demand it. AmazonFresh is expected to expand soon to 20 more urban markets–including some outside America. Los Angeles became the second AmazonFresh market, this past June, and customers there were offered something the folks in Seattle must wish they got: a free trial of Prime Fresh, the upgrade version of Amazon Prime, which provides free shipping of products and free delivery of groceries for orders over $35. Subscribers will pay an annual fee of $299. Considering that grocery delivery otherwise costs between $8 and $10 each time (depending on order size), the subscription covers itself after about 30 deliveries–which busy families will quickly exceed.
Bezos, in his cagey, friendly way, seems more excited about my Fresh experience than he is about describing Fresh’s future. He seems almost surprised that the service worked so well at a hotel, given that it was designed for home delivery. “Thank you!” he shouts. After peppering me with questions on how, precisely, the delivery went down, he finally gets around to addressing the service’s business purpose.
“WE WON’T INVEST IN A COMPANY UNLESS THEY CAN TELL US WHY THEY WON’T GET STEAMROLLED BY AMAZON.”
“We’d been doing a very efficient job with our current distribution model for a wide variety of things,” Bezos says. “Diapers? Fine, no problem. Even Cheerios. But there are a bunch of products that you can’t just wrap up in a cardboard box and ship ’em. It doesn’t work for milk. It doesn’t work for hamburger.” So he developed a service that would work–not because he suddenly wanted to become your full-service grocer but because of how often people buy food.
AmazonFresh is actually a Trojan horse, a service designed for a much greater purpose. “It was articulated [in the initial, internal pitch to Bezos] that this would work with the broader rollout of same-day delivery,” says Tom Furphy, a former Amazon executive who launched Fresh in 2007 and ran it until 2009. Creating a same-day delivery service poses tremendous logistical and economic hurdles. It’s the so-called last-mile problem–you can ship trucks’ worth of packages from a warehouse easily enough, but getting an individual package to wind its way through a single neighborhood and arrive at a single consumer’s door isn’t easy. The volume of freight and frequency of delivery must outweigh the costs of fuel and time, or else this last mile is wildly expensive. You can’t hire a battalion of Des unless they earn their keep. So by expanding grocery delivery, Amazon hopes to transform monthly customers to weekly–or even thrice-weekly–customers. And that, in turn, will produce the kind of order volume that makes same-day delivery worth investing in. “Think of the synergy between Prime, same-day delivery, and Fresh,” says Furphy. “When all of those things start working in concert, it can be a very beautiful thing.”
AmazonFresh is arguably the last link in Bezos’s big plan: to make Amazon the dominant servicer–not just seller–of the entire retail experience. The difference is crucial. Third-party sellers, retailers large and small, now account for 40% of Amazon’s product sales. Amazon generally gets up to a 20% slice of each transaction. Those sellers are also highly incentivized to use Fulfillment by Amazon (known as FBA). Rather than shipping their products themselves after a sale is made on the Amazon site, these retailers let Amazon do the heavy lifting, picking and packing at places like the Phoenix center. For the sellers, an FBA agreement grants them access to Prime shipping speeds, which can help them win new customers and can allow them to sell at slightly higher prices. For Amazon, FBA increases sales, profits, and the likelihood that any shopper can find any item on its website.
“NOW YOU HAVE SMART BRICK-AND-MORTAR STORES SAYING, ‘WHY ISN’T OUR EXPERIENCE MORE INTUITIVE, AS IT IS ON THE WEB?’”
The burgeoning AmazonFresh transportation network will help expand these numbers. In Los Angeles and Seattle, a fleet of Fresh trucks delivers everything from full-course meals to chocolate from local merchants. The bright green branded trucks–with polite drivers in branded uniforms–let Amazon personify its brand, giving it the same kind of trustworthy familiarity that fueled the rise of UPS in the 1930s. “If you have all kinds of fly-by-night operations coming to your door, people don’t like that,” says Yossi Sheffi, professor and director of the MIT Center for Transportation and Logistics. “It’s different with someone in a U.S. Postal Service or FedEx uniform. Those brands inspire confidence.”
As Amazon evolves into a same-day delivery service, its active transportation fleet could become yet another competitive advantage. By supplementing its long-term relationships with UPS and FedEx with its own Fresh trucks, Amazon may well be able to deliver faster than retailers that depend entirely on outside services. “Pretty soon, if you’re a retailer with your online business, you’re going to be faced with a choice,” says Brian Walker, a former analyst at Forrester Research who is now with Hybris, a provider of e-commerce software. “You’re not going to be able to match Amazon, so you’re going to have to consider partnering with them and leveraging their network.”
This shift could even turn Amazon into a competitor to UPS and FedEx, the long-standing duopoly of next-day U.S. shipping. “If Amazon could do it at enough scale, they could offer shipping at a great value and still eke out some margin,” says Walker. “In classic Amazon fashion, they could leverage the infrastructure they’ve built for themselves, take a disruptive approach to the pricing, and run it as an efficiency play.”
Amazon has been down this road before. Its Web Services began as an efficient, reliable back end to handle its own web operations–then became so adept that it now provides digital services for an enormous range of customers, including Netflix and, reportedly, Apple. It’s not impossible to imagine Amazon doing the same with shipping. Last year, the company cut its shipping costs as a percentage of sales from 5.4% to 4.5%. As it builds more distribution centers, installs more lockers, and builds out its fleet, Amazon is likely to drive those efficiency costs down even further.
So is Amazon Freight Services Bezos’s next mission? When I ask, the laugh lines vanish from his face as if someone flipped a switch on his back. He contends that same-day delivery is too expensive outside of urban markets and that it only makes sense for Amazon to deliver its own products within the Fresh program. In China, he explains, Amazon does in fact deliver products via many couriers and bicycle messengers. “But in a country like the United States,” he says, “we have such a sophisticated last-mile delivery system that it makes more sense for Amazon to use that system to reach its customers in a rapid and accurate way.” When I ask whether he would consider, say, buying UPS, with its 90,000 trucks–or even more radically, purchasing the foundering USPS, with its 213,000 vehicles running daily through America’s cities and towns–Bezos scoffs. But he won’t precisely say no.

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Rivals aren’t waiting for an answer. EBay has launched eBay Now, a $5 service that uses its own branded couriers in New York, San Francisco, and San Jose, to fetch products from local retail stores like Best Buy and Toys “R” Us and deliver them to customers within an hour. Google, fully aware that Amazon’s market share in product search is substantial (now 30% to Google’s 13%), has launched a pilot service called Google Shopping Express, which partners with courier companies. Walmart–which has booted all Kindles from its stores–started testing same-day delivery in select cities during the last holiday season, shipping items directly from its stores. (Joel Anderson, chief executive of Walmart.com, even suggested paying in-store shoppers to deliver online orders to other customers the same day. Come for a handsaw, leave with a job!)
These are the sort of ideas that retailers–both e-commerce and physical, large and small–will have to consider as Amazon expands. Guys like Jeff Jordan, partner at well-known venture firm Andreessen Horowitz, will make sure of it. His firm follows and invests in direct-to-consumer businesses. “We won’t invest in a company,” he says, “unless they can tell us why they won’t get steamrolled by Amazon.”
Given the astounding growth of Amazon, and the seemingly infinite ways it has defied the critics, Bezos may have proved himself the best CEO in the world at taking the long view. But he doesn’t like talking about it. “Did you bring the crystal ball? I left mine at home today,” he quips. He does, however, like discussing what the future might bring for his customers. In fact, he likes talking about his customer so much that the word can seem like a conversational tic; he used it 40 times, by my count, in just one interview. “It’s impossible to imagine that 10 years from now, I could interview an Amazon customer and they would tell me, ‘Yeah, I really love Amazon. I just wish your prices were a little higher,’” he says. “Or, ‘I just wish you’d deliver a little more slowly.’” In Bezos’s world, the goal of the coming decade is a lot like the goal of the past two: Be cheap. Be fast. That’s how you win.
There is, naturally, no guarantee that Bezos will simply win and win and win. The bigger Amazon gets, the greater the number and variety of stakeholders required to make the Amazon machine hum. Many seem to be getting increasingly frustrated. Consider Amazon’s third-party sellers–that group making up 40% of the company’s product sales. Earlier this year, Amazon issued a series of fee hikes for use of its fulfillment services, ranging from as low as 5 cents per smallish unit to as much as $100 for heavier or awkwardly shaped items (like a whiteboard, say, or roll-away bed). Many sellers took to Amazon’s forums to complain, and others threatened to go to eBay, which mostly leaves fulfillment to its sellers. “I think Amazon is a necessary evil,” says Louisa Eyler, distributor for Lock Laces, a shoelace product that sells as many as 3,000 units per week on Amazon. After the price hike, Eyler says her total fees for the $7.99 item went from $2.37 to $3.62. She says Amazon now makes more per unit than she does.
Or consider the frustrations of Amazon employees, who are striking at two of its eight German facilities in an effort to wrest higher wages and overtime pay. At the height of the conflict, on June 17, 1,300 workers walked off the job. (It is one of Amazon’s largest walk-offs in its biggest foreign market, and could result in shipping delays.) Meanwhile, Amazon workers in the U.S. have filed a lawsuit claiming that they’ve been subject to excessive security checks–to search for pilfered items–at warehouses. The suit alleges their wait could last as long as 25 minutes, an inconvenience Amazon would never subject its customers to. “It means there’s a broken process somewhere,” says Annette Gleneicki, an executive at Confirmit, a software company that helps businesses capture customer and employee feedback. “[Bezos] clearly inspires passion in his employees, but that’s only sustainable for so long.”
The company could be vulnerable on other fronts as well. Target and Walgreens have “geo-fenced” their stores so their mobile apps can guide customers directly to the products they desire. Walmart and Macy’s have begun making their stores do double-duty, both as a place to shop and a warehouse from which to ship products. (The strategy seems to be paying off for Macy’s, which recently reported a jump in first-quarter profit and is now fulfilling 10% of its online purchases from its stores.) They’re proving that retail won’t go away–it’ll learn and adapt. “Now you have smart brick-and-mortar stores saying, Why isn’t our experience more intuitive, as it is on the web?” says Doug Stephens, author of The Retail Revival: Re-Imagining Business for the New Age of Consumerism. “We should know a consumer when they walk in, and what they bought before, in the same way as Amazon’s recommendation engine.”
Bezos won’t admit to any deep concern. While Amazon’s paper-thin profits continue to perplex observers (the company netted only $82 million in the first quarter of 2013), the three primary weapons in its retail takeover–fulfillment centers, Amazon Prime, and now AmazonFresh–are coming to maturity. If the next year tells us anything about Amazon’s future, it should reveal whether Bezos’s decision to plow billions back into these operations will give the company an end-to-end service advantage that might be nearly impossible for its competitors to overcome.
The sun seems to be setting on Bezos’s big Day One. Before we part ways in Seattle, I ask him what we can expect to see on Day Two. “Day Two will be when the rate of change slows,” he replies. “But there’s still so much you can do with technology to improve the customer experience. And that’s the sense in which I believe it’s still Day One, and that it’s early in the day. If anything, the rate of change is accelerating.”
Of course, Bezos is the accelerator.

Amazon Buys Twitch For $970 Million In Cash
EUGENE KIM
AUG. 25, 2014, 4:03 PM 13,994 21
Patrick T. Fallon/Getty Images
Twitch CEO Emmett Shear.
Amazon said on Monday it would pay $970 million in cash for Twitch, a live video-game-streaming site with more than 55 million users that’s like YouTube for video games.
As of July, Twitch had over 15 billion minutes of content, and users were spending more than 100 minutes a day on the site, on average. Twitch users can host live streams of their gaming sessions and broadcast them to the world. They can also chop up their sessions into segments for streaming later.
It’s also a resource for gamers who like to show off their unique skills. For example, there’s an entire community on Twitch dedicated to doing weird stuff like beating Zelda games in under 20 minutes or playing massively collaborative games of Pokemon.
Twitch/Screenshot
A Twitch streaming session.
Twitch is a huge part of the internet, and it accounts for nearly 2% of all traffic in the U.S. during peak hours, according to a report by The Wall Street Journal. Only Netflix, Google, and Apple account for more traffic. In that respect, Twitch even streams more video than Hulu.
Twitch also accounts for 40% of all live-streamed internet content, according to Business Insider Intelligence:
BI Intelligence
What’s really impressive is that Twitch was able to become so big after just three years.
You can see Amazon’s purchase of Twitch as a play to take over the future of TV. More and more content is being streamed online, and more and more hours of video watching are being done on sites like YouTube, Netflix, and Hulu. Amazon has its own streaming video service called Amazon Instant that comes with Amazon Prime memberships. Amazon Instant includes thousands of streaming movies and TV shows, including original shows like “Alpha House.”
Amazon
Alpha House is an original Amazon show.
Earlier Monday, multiple reports indicated Amazon was in late-stage talks to acquire Twitch. The news came as a big surprise because just last month it was reported that Google had agreed to acquire Twitch for about $1 billion. That deal, however, was never officially confirmed.
The Google-Twitch deal felt like a natural fit, since it would’ve been a good way for YouTube to expand its video offerings. Yahoo also tried to buy Twitch for $970 million, but Amazon swooped in and got it instead.
It’s unclear what had caused the Google-Twitch deal to fall through, but one possible reason is over antitrust issues. Since Google already owns YouTube, the world’s largest video streaming site, acquiring another massive video streaming site like Twitch could raise antitrust issues. According to Forbes, the two sides couldn’t agree on the potential break up fee.
Here’s the official announcement from Amazon:
Amazon.com, Inc. (NASDAQ: AMZN) today announced that it has reached an agreement to acquire Twitch Interactive, Inc., the leading live video platform for gamers. In July, more than 55 million unique visitors viewed more than 15 billion minutes of content on Twitch produced by more than 1 million broadcasters, including individual gamers, pro players, publishers, developers, media outlets, conventions and stadium-filling esports organizations.
“Broadcasting and watching gameplay is a global phenomenon and Twitch has built a platform that brings together tens of millions of people who watch billions of minutes of games each month – from The International, to breaking the world record for Mario, to gaming conferences like E3. And, amazingly, Twitch is only three years old,” said Jeff Bezos, founder and CEO of Amazon.com. “Like Twitch, we obsess over customers and like to think differently, and we look forward to learning from them and helping them move even faster to build new services for the gaming community.”
“Amazon and Twitch optimize for our customers first and are both believers in the future of gaming,” said Twitch CEO Emmett Shear. “Being part of Amazon will let us do even more for our community. We will be able to create tools and services faster than we could have independently. This change will mean great things for our community, and will let us bring Twitch to even more people around the world.”
Twitch launched in June 2011 to focus exclusively on live video for gamers. Under the terms of the agreement, which has been approved by Twitch’s shareholders, Amazon will acquire all of the outstanding shares of Twitch for approximately $970 million in cash, as adjusted for the assumption of options and other items. Subject to customary closing conditions, the acquisition is expected to close in the second half of 2014.
Here’s a letter from Twitch’s CEO:
Dear Twitch Community,
It’s almost unbelievable that slightly more than 3 years ago, Twitch didn’t exist. The moment we launched, we knew we had stumbled across something special. But what followed surprised us as much as anyone else, and the impact it’s had on both the community and us has been truly profound. Your talent, your passion, your dedication to gaming, your memes, your brilliance – these have made Twitch what it is today. Every day, we strive to live up to the standard set by you, the community. We want to create the very best place to share your gaming and life online, and that mission continues to guide us. Together with you, we’ve found new ways of connecting developers and publishers with their fans. We’ve created a whole new kind of career that lets people make a living sharing their love of games. We’ve brought billions of hours of entertainment, laughter, joy and the occasional ragequit. I think we can all call that a pretty good start. Today, I’m pleased to announce we’ve been acquired by Amazon. We chose Amazon because they believe in our community, they share our values and long-term vision, and they want to help us get there faster. We’re keeping most everything the same: our office, our employees, our brand, and most importantly our independence. But with Amazon’s support we’ll have the resources to bring you an even better Twitch. I personally want to thank you, each and every member of the Twitch community, for what you’ve created. Thank you for putting your faith in us. Thank you for sticking with us through growing pains and stumbles. Thank you for bringing your very best to us and sharing it with the world. Thank you, from a group of gamers who never dreamed they’d get to help shape the face of the industry that we love so much. It’s dangerous to go alone. On behalf of myself and everyone else at Twitch, thank you for coming with us. Emmett Shear, CEO
Disclosure: Jeff Bezos is an investor in Business Insider through his personal investment company Bezos Expeditions.
SEE ALSO:  Here’s Why Amazon Just Paid Nearly $1 Billion For A Site Where You Can Watch People Play Video Games
Read more: http://www.businessinsider.com/amazon-buys-twitch-2014-8#ixzz3BSBNYa53
Amazon Is Turning Into Google
STEVE KOVACH
AUG. 25, 2014, 7:15 PM 1,038 3
Amazon Inc.
Amazon CEO Jeff Bezos.
Tell me which company this sounds like:
A company that…
• Has its own mobile operating system for tablets and smartphones.
• Has its own app store.
• Sells digital music, books, movies, and TV shows.
• Will soon have an online ad network.
• Created a way to accept payments with a smartphone.
• Owns the servers that act as the backbone for several major apps and startups and even parts of the CIA.
• Is experimenting with drones.
It’s not Google. It’s Amazon.
But just like Google has expanded beyond search into everything from finding ways to cheat death to making cars that can drive themselves, Amazon has been increasingly expanding beyond its core e-commerce business.
And in recent months, that only seems to be speeding up.
Amazon’s $970 million purchase of Twitch, a site that lets you watch people play video games via a live stream, is its latest push into original video content and a move to transform itself into part media company. It’s a longer-term bet that the trend of watching stuff online versus cable will continue.
Add that on top of the stuff listed above, and Amazon suddenly sounds less like an online store for buying books and gifts and more like a company trying to insert itself into everything you do online. It sounds very Google-y.
Plus …
There’s experimentation with same-day delivery, grocery delivery, and point of sale systems for brick-and-mortar retailers. Those are all things Google is working on or has at least experimented with.
The only difference, of course, is that Google is wildly profitable while Amazon continues to post losses each quarter. (Next quarter could be a doozy. Amazon said to expect at least a $410 million operating loss.)
But it’s also a changing company, one that’s no longly simply “the everything store,” but an entity creeping its way into everything we do from shop to play games to run our small businesses.
Disclosure: Jeff Bezos is an investor in Business Insider through his personal investment company Bezos Expeditions.
SEE ALSO:  9 impressive stats about Twitch
Read more: http://www.businessinsider.com/amazon-is-google-2014-8#ixzz3BSE4Hglt
Bezos Confirms

AmazonFresh Expansion Plans

, Says Drones Are for Real
April 10, 2014, 9:15 AM PDT
By Jason Del Rey
Grocery delivery fans outside of Seattle and California, rejoice: Amazon plans to expand its AmazonFresh offering beyond its current three markets, CEO Jeff Bezos confirmed in his 2013 letter to shareholders published today.
“We’ll continue our methodical approach — measuring and refining AmazonFresh — with the goal of bringing this incredible service to more cities over time,” he said in the letter.
For five years, Fresh was only available in Seattle, before the company launched the program last year in Los Angeles and, six months later, San Francisco. Several reports over the past year have said Amazon plans to expand the delivery service into 10 to 20 more new markets this year, but this may be the first time Bezos has publicly acknowledged the expansion plans.
Through Fresh, shoppers can order deliveries of groceries and hundreds of thousands of other items, from TVs to toys, that arrive either that same day or the following morning. Industry observers believe that part of Amazon’s reason for delivering groceries is that it will create enough sales volume and delivery demand to justify delivering all other Amazon merchandise within one day.
Another highlight from the letter: Drones.
“The Prime Air team is already flight testing our 5th and 6th generation aerial vehicles,” Bezos wrote, “and we are in the design phase on generations 7 and 8.”
Is it possible that drone delivery is still a marketing stunt? Sure. If so, Bezos is sticking to the script.
More from this story


SLIDE SHOW:
Headed your way: AmazonFresh widens range of grocery deliveries
Doorstep delivery: Our reporter gives AmazonFresh grocery service a whirl
BY NANCY LUNA / STAFF WRITER
Published: June 20, 2014 Updated: June 23, 2014 11:44 a.m.
STEVEN GEORGES, CONTRIBUTING PHOTOGRAPHER
VONS VS. AMAZONFRESH
Here are a few price comparisons based on items found online this week:
1 gallon of Alta Dena fat-free milk: $5.49 Vons vs. $4.99 AmazonFresh
59-ounce jug of Simply Lemonade: $2.50 Vons vs. $2 AmazonFresh
5 ounces organic baby romaine: $3.90 O private-label Vons brand vs. $3.39 Earthbound brand at AmazonFresh
24-pack of Aquafina 16.9-ounce bottled water: $5.49 Vons vs. $4.29 AmazonFresh
Tide Free and Gentle (100 ounces): $11.99 Vons vs. $11.97 AmazonFresh
20-pack Coke Zero: $8.29 Vons vs. $6.99 AmazonFresh
Winder Farms: A Utah-based delivery service in California, Utah and Nevada. Delivers roughly 300 farm fresh items. Delivery in Orange County and parts of Los Angeles County. winderfarms.com
Good Eggs: Delivery of locally grown, sustainable goods from stores or farmers’ markets. Los Angeles County only. goodeggs.com/about/mission
Vons: Traditional market with home delivery in Orange County. shop.safeway.com
Instacart: Delivers from local stores like Whole Foods, Ralphs and Bristol Farms. Limited to a few ZIP codes in Los Angeles County. instacart.com/store/whole-foods
Deliveer: Personal shoppers deliver groceries from Whole Foods Market, Trader Joe’s, Vons and Costco in Pasadena, San Marino, South Pasadena and Altadena. Expansion to other parts of Los Angeles County coming soon. deliveer.com
As Amazon’s fledgling grocery service in Southern California widens its reach, some boutique food suppliers say the experiment has proven to be a boon for business.
Huntington Meats saw sales go from single-digit growth to double digits after the first month of partnering with AmazonFresh, a doorstep food service that launched last summer in Los Angeles.
The 30-year-old butcher shop, known for its top-grade meats and wild game, partnered with AmazonFresh last summer. Co-owner Jim Cascone said his meat market sells the “whole store,” or 175 items, through the online site, from free-range chickens to ground elk.
Demand for his specialty goods continues to soar and was boosted in recent weeks when the company expanded its service to most of Orange County.
“We’re very pleased,” said Cascone. “We’re definitely getting a lot of business out of it.”
For other Amazon partners, the impact has been much less dramatic. Greg Daniels, executive chef-partner at Haven Collective, has been working with AmazonFresh the last six months. The company’s Provisions Market bottle and cheese shop in Old Towne Orange offers Amazon shoppers specialty cheeses, cured meats, chocolate and a wide selection of craft beer.
“Cheese is popular, and beer not too much yet,” said Daniels. “It’s definitely brand exposure more than money.”
Amazon’s doorstep service initially was limited to Los Angeles, four cities in Orange County and parts of Long Beach. Shoppers choose from a wide selection – some 500,000 items – of merchandise, groceries and specialty foods.
In recent weeks, AmazonFresh has expanded to Orange, Tustin, Garden Grove, Aliso Viejo, Santa Ana, Laguna Niguel and Mission Viejo in addition to Irvine, Anaheim, Huntington Beach and Newport Beach. All of Long Beach is also eligible for delivery, a company spokesperson said.
The expansion comes as Amazon sees positive results in the greater Los Angeles area.
“While I can’t share specific numbers, we are very pleased with the response from our customers so far,” AmazonFresh said in a statement.
AmazonFresh’s grocery delivery expansion comes as doorstep food services experience a resurgence after failing years ago.
In 2013, revenue from online grocery sales reached $6.5 billion, according to market research firm IBIS World. By 2018, sales are projected to reach $10.1 billion as time-strapped consumers seek convenient ways to shop through mobiles devices and home computers, IBIS said.
AmazonFresh entered Los Angeles last summer after testing its grocery service near its home turf in Seattle. The service is also available in San Francisco and Berkeley.
Other food delivery options in the region include Winder Farms, Good Eggs, Deliveer, Instacart and Vons.
AmazonFresh rolls into San Diego
By Katherine P. Harvey2:08 P.M.JULY 29, 2014Updated5:36 P.M.

This entry was posted in Business Models, E-Commerce and tagged Amazon on August 20, 2014. Edit

==============AMAZING AMAZON POST AUGUST, 2014 ========

Amazing Amazon
Continually updated notes as I try to keep up with Jeff Bezos (impossible)
As of 10/23/2013

Background
JCR was working with a partner at a major consulting firm on CGF business. In a casual moment, they got talking about e-commerce, and the subject of Amazon came up. The partner shared that they had just completed a major piece about Amazon, using entirely public sources, for a retailer client. He graciously offered to share the work, and did not label the work confidential. JCR reviewed it and thought that the sources and insights were outstanding – but he thought it best not to quote or share the document directly. So these facts are largely from that analysis and that analysis’ public sources (shown at the end of this paper). They are extended by other facts and articles discovered by JCR.

Purpose

The purpose of this working paper is to lay out a case that Amazon deserves high-priority consideration by virtually all Fortune 1000 companies operating in a retail or manufacturer environment.
!Hypotheses
From 2015-2018, there is a high likelihood that:

1. E-commercewillbemainstream.Itwillbecomethepreferredmethodofshoppingformany consumers, and it will enjoy ubiquity and mainstream use by the global middle class like cell phones do today;
2. Amazon will lead e-commerce. Amazon will be – far and away – the leader in the e-commerce retailing space;
3. E-commercewillimpactfoodandbeverage.Itwillemergeasaforceinfoodandbeverageretail;
4. Amazon will aggressively enter food and beverage retail globally. They will establish themselves
in key markets as one of the top 10 customers of most manufacturers;
5. Amazon will “perfect” home delivery. They will crack the “last mile” of retail. They will “perfect” delivering direct to the home or to a designated agent of the home, thereby making obsolete traditional retailers who cannot do this;
6. Amazon will “perfect” their business model. Amazon will dominate best practice in logistics, fulfillment, and customer satisfaction over this planning period, in a manner so effective that others who fail to keep up will be left behind by 2016;
7. Amazon will disrupt most business models. Amazon can potentially disrupt fundamental assumptions bout store delivery, merchandising, and the viability of home delivery

Discussion
Experts project that:
– E-Commerce will exceed $1,400 billion revenue by 2020
– It will be ubiquitous, accepted by virtually all (like cell phones today)
– It will be primary source of purchasing by consumers, who will be intensively engaged
– It will extend from its current 33 retail categories into all retail categories

1. E-Commerce Will Be Mainstream
2. Amazon Will Lead E-Commerce
Amazon will be – far and away – the leader in the e-commerce retailing space. Amazon revenue will continue to grow fast: in 2013 it was $75 billion, up from $61, $48, $34, $25, and $19 billion in 2012, 2011, 2010, 2009, and 2008 respectively. Analysts predict revenue will reach $90 billion in 2014. By 2015, Amazon is highly likely to have revenues exceeding $100 billion annually. Conservatively, Amazon revenue is likely to grow 20% per year from 2015 to 2020, reaching at least $250 billion in 2020 (one third of e-commerce and more than half the size of Wal-Mart today).
Exhibit 2: Projected Amazon Revenue Growth (2008-2024)

Note: 2008-2012 are actual revenues !

Amazon will begin to directly threaten Walmart over this 2015-2020 planning cycle
Today, Amazon revenue ($61 billion) is small compared to brick & mortar Wal-Mart, who closed 2012 with revenue of $444 billion. But, it nonetheless is remarkable for an online retailer. In 2000, the entire universe

of e-commerce was predicted to be less than $20B by Forrester and yet today, Amazon alone sells $61 MM and is closing in on $100 MM.
In contrast, it appears that Wal-Mart online sales will be less than $10 million. $61 million versus $10 million: it seems reasonably clear who is going to win in e-commerce. Although recent reports make it very clear that Wal-Mart has woken up to the threat and is responding so no one can know for sure what the outcome of this battle will be.

Not bad for a company that opened for business as a bookseller less than 20 years ago – in 1995.

3. E-Commerce Will Impact Food And Beverage
Food & Beverages to Grow as a Proportion of Total E-Commerce Sales
Amazon will emerge as a force in food and beverage retail. Some have concluded that grocery was approximately $36M in 2011 and would nearly double by 2015 to $57M and nearly triple from 2011 to $101B in 2020. Furthermore, it is predicted that beverages would grow from $6B in 2011, to $8B in 2015, and to $17B by 2020 (see Exhibit 1).

Amazon will establish itself in key markets as one of our top 10 customers. The food and beverage category will grow in importance online and Amazon is expected to own 30% of that market.

Amazon will crack the “last mile” of retail. They will “perfect” delivering direct to the home or to a designated agent of the home, thereby marginalizing traditional retailers who cannot do this. Amazon is currently testing and honing their approach through AmazonFresh.

AmazonFresh
AmazonFresh is a new service that is currently available in Seattle and Los Angeles in select zip codes. The service offers same-day and early morning delivery on orders of over $35 of more than 500,000 Amazon items, including fresh grocery and local products. The annual “membership” costs $299 with unlimited free delivery and is offered as an additional level of Amazon Prime.

4. Amazon Will Aggressively Enter Food and Beverage Retail Globally

5. Amazon Will “Perfect” Home Delivery
Exhibit 3: AmazonFresh Sortable Shopping

6. Amazon Will “Perfect” Their Business Model
Amazon will dominate best practice in logistics, fulfillment, and customer satisfaction over this planning period, in a manner so effective that others who fail to keep up will be left behind by 2016. One example of their current testing in fulfillment, logistics, and delivery is the launch of

Amazon Locker.
Amazon Locker
Now Amazon has taken a small step toward eliminating the UPS wait with a service inspired less by the internet and more by the Port Authority. Amazon Locker allows you to have your packages sent to the equivalent of single-use P.O. boxes housed in 24-hour convenience stores, grocery stores and drug stores. Amazon sends you an email with a pickup code, which you enter on a touchscreen to open the door of the locker containing your package. You have three days from the delivery date to pick it up.
Additionally, Amazon has started sharing warehouse space with some of its key suppliers. Amazon has been sharing warehouse space with P&G for 3 years and is now in at least 7 P&G distribution centers. Amazon also has arrangements in place or is working out deals with companies such as Kimberly-Clark, Seventh Generation, and Georgia-Pacific.
7. Amazon Will Disrupt Many Business Models
Amazon can potentially disrupt fundamental assumptions about direct store delivery, merchandising, bottlers, OBPPC, and the viability of home delivery.

================ 2013 AMAZON FACT SHEET ========

Amazon Fact Sheet
Last Updated in Late 2013

Basic Facts
Corporate mission: We seek to be Earth’s most customer-centric company for four primary customer sets: consumers, sellers, enterprises, and content creators
Headquarters: Seattle, WA
When Founded: The company was incorporated in 1994 as Cadabra and went online as Amazon.com in 1995
CEO: Jeffrey Bezos
Number of Employees: 97,000
Number of Retail Categories: 33 categories
Customers: 200 million active customers; 132 million unique visitors each month Fulfillment Centers: 89 worldwide, 54 million square feet of total space

Geographical Presence
Amazon has 89 fulfillment centers worldwide
Fulfillment centers are located in 8 countries including USA, Canada, France, Germany, Italy, China, Japan, and the UK
Amazon has separate retail sites for USA, Canada, France, Germany, Italy, China, Japan, and UK plus Brazil, India, Mexico, and Spain
The US fulfillment centers are located in: Arizona, California, Delaware, Indiana, Kansas, Kentucky, Nevada, New Hampshire, Pennsylvania, South Carolina, Tennessee, Texas, Virginia, Washington 1995: 400 square foot 2010: 50 fulfillment centers 26M square feet
Revenue was $61, $48, $34, $25, and $19B in 2012, 2011, 2010, 2009, and 2008 respectively o Annual revenue in 2011 was 27% more than Google’s
Revenue to reach $74.6B in 2013 (though $0 net income), 24.6% CAGR from 2011 Amazon’s market share represents one third of U.S. e-commerce sales

Amazon on pace to reach over $125B globally by 2016; 4.5% CAGR from 2010

North America: $65.4B by 2016; 23.2% CAGR from 2010

International: $61.3B by 2016; 26.3% CAGR from 2010 Amazon has had one of the fastest growths in the internet’s history

Financial Results

After 5 years eBay reached $0.4B, Google reached $1.5B, and Amazon reached $2.8B
Amazon Revenue vs. Net Income ($M)
$ $ $ $
70,000 52,500 35,000 17,500
00 (17,500)
$
2008 2009 2010 2011 2012
!
Millions ($)
!Organizational Structure
CEO and founder Jeffery Bezos and an eight-member board of directors
CEO oversees the Chief Financial Officer (CFO), the Chief Technology Officer and the following 8 departments:
o Business Development o E-Commerce Platform o International Retail
o North America Retail o Web Services
o Digital Media
o Legal & Secretary o Kindle
CFO oversees the Real Estate and Control department
International Retail oversees three separate departments: China, Europe and India
North America Retail oversees the following five departments: Seller Services, Operations, Toys, Sports & Home Improvement, Amazon Publishing and Music & Video
Web Services department oversees Amazon S3 and Database Services
Other departments include Product Development & Studios, Europe Operations, Global Advertising Sales, Computing Services, and Global Customer Fulfillment

Key Acquisitions
1998: PlanetAll, Junglee, Bookpages.co.uk
1999: Internet Movie Database (IMDb), Alexa Internet, Accept.com, Exchange.com, Pets.com, Home
Grocer, Back-to-Basics Toys, drugstore.com
2004: Joyo.com
2005: BookSurge, Mobipocket.com, CreateSpace.com
2006: Shopbop
2007: DPRreview.com, Brilliance Audio
2008: Audible.com, Fabric.com, Box Office Mojo, AbeBooks, Shelfari, Reflexive Entertainment 2009: Zappos, Lexcycle. SnapTell, Stanza
2010: Touchco, Woot, Quidsi, BuyVIP, Amie Street
2011: LoveFilm, The Book Depository, Pushbutton, Yap
2012: Kiva Systems, Teachstreet, Evi
2013: IVONA Software, GoodReads, Liquavista
Corporate Timeline (1995-2013)
July, 1995
o Began selling books online

o Two small fulfillment centers – Seattle and Delaware 1999
o Acquired Pets.com for $58 million
o Acquired Home Grocer for $42.5 million
o Acquired Back-to-Basics toys for $135 million
o Acquired drugstore.com for $44 million
o (Since then have acquired hardware, car, electronics, sporting goods, luxury, wine, etc.)

2001
o Became the online engine behind Borders.com o Broadened beyond books to CD’s and DVD’s

2005
o Launched Amazon Prime 2007
o Launched Kindle (developed by Lab126, their internal appliance R&D shop)
o Launched Amazon Fresh in Seattle 2008
o $19 billion revenue 2009
o $24.5 billion revenue (+28%)
o $.6 billion net income
o Acquired Zappos for $920 million
2010
o Acquired Quidsi for $500 million (owns Diapers.com) 2011
o $48 billion revenue (+41%) 2012
o 164 million active customers
o $61 billion revenue (+27%)
o $.6 billion net income
o Launched AmazonSupply (with 500,000 products, in 14 categories, B2B target)
• • •
o (Instant new major competitor for Blockbuster and Netflix)
2013
o $75 billion revenue PROJECTED (+22%)
o $0 net income
o 200 million active customers
!o (132 million every month, compared to EBAY 60MM; Wal-Mart 63 MM; Apple 18MM)
Product Categories
In 15 years, Amazon went from one category (books) to 33 (cloud services, clothing, baby products, sports, electronics, music, video games, books, film, audio, beauty products, tools & home improvement, office products etc.)
!• Has introduced two new product categories every year for almost a decade !Strategies
Build, buy, partner
o Build: new categories (e.g., MYHABIT)
o Buy: well-established competitors (E.g., Quidsi)
o Partner: offers tech service / e-commerce expertize to third parties (e.g., cobranded website
with Toys “R” Us Customer-first solutions
o Bottom-up approach: customer needs drive everything
o Frugality: Amazon continually seeking to do things cost-efficiently o Innovation: Amazon always seeing simpler solutions

Data & human driven customer service
o Every employee, even the CEO, spends two days every two years on the service desk to answer
calls and help customers
o 90% of customer service by email rather than by telephone
o Amazon has developed its own software to manage email centers

Convenience
o 1-click ordering
o Amazon Prime – $79 / year, instant streaming of movies & TV shows, instant access to thousands
of Kindle Books, free-two day shipping
o Amazon Locker – lockers installed in grocery, convenience and drugstore outlets that can accept
packages for customers for a later pick-up o Moving towards same-day delivery
▪ Building warehouses close to city center – risky because Amazon will pay states taxes it did not pay before, but it will get closer to same-day deliver
▪ Warehouses currently being built in California, Indiana, New Jersey, Tennessee, South Carolina, Virginia
o Amazon Supply – free two-day shipping for orders over $50 Low price
o Amazon significantly cheaper than competitors Digital optimization of supply chain
• •
Amazon automatically chooses the cheapest origin for the customer’s order in real-time It re-optimizes it based on the customers’ orders
Fast moving items are stored in all the fulfillment centers
Hard-to-find items are kept in small quantities in one or two fulfillment centers
Easily movable items (e.g. media) are stored in highly automated facilities
Extensive use of tracing
Drop shipping: when applicable, Amazon provides packages and asks the supplier to ship the product himself
Third-party sellers follow the same principle, which increases margins
Selling at a loss – costs around $210 to produce, sold at $199
But over the first 6 months of use, Amazon makes $136 of margin on average on every Kindle Fire by selling digital content
Amazon is developing international partnerships with retailers (e.g., Darty in France) to sell more Kindles

Kindle

Wal-Mart had 62.5M unique visitors in August 2013, compared with Amazon’s 133M Wal-Mart copycatting some of Amazon’s most successful tactics
o Trying out lockers, allowing shoppers to order items online and pick them up in stores o Dabbling in same-day delivery (testing in four cities) and even going a step further than
Amazon by attempting to crowd-source package drop-off among customers
o Investing in web technology to improve both their site’s appearance and ease of navigation

Comparisons to Wal-Mart
Contrary to Wal-Mart, which failed to enter the German and South Korean markets, Amazon’s international expansion has been successful
Amazon to reach $74.6B in 2013, 24.6% CAGR from 2011
o Wal-Mart’s revenue will be $500B in 2013, but its revenue in e-commerce by 2014 will reach just $10B
E-commerce is growing at 11% a year, but sales for consumer packaged goods online – food, groceries, everyday items – are growing at closer to 20% this is the area Wal-Mart will go after
o Amazon already one step ahead with Amazon Fresh !!

Added Sources:
How Amazon Controls Ecommerce (Slides)
http://www.forbes.com/sites/clareoconnor/2013/04/23/wal-mart-vs-amazon-worlds-biggest-e-commerce- battle-could-boil-down-to-vegetables/
======================

Rene Dubos

Rene Dubos made a lasting impression on me. Reading his books and essays, I recall even today his humanism, optimism, and his insistence on localism.

He held the highest rank in the field of microbiology, but what I remember most are his writings on environmentalism.

CREDIT: https://en.wikipedia.org/wiki/René_Dubos

René Dubos
From Wikipedia, the free encyclopedia

René Jules Dubos

Born
20 February 1901
Saint-Brice-sous-Forêt, France[1]
Died
20 February 1982 (aged 81)
New York, New York, U.S.
Nationality
French-born naturalized American
Fields
Microbiology
Institutions
The Rockefeller University (formerly The Rockefeller Institute for Medical Research)
Alma mater
Rutgers University
Known for
Isolation and first successful testing of natural antibiotics
Coining the phrase “Think globally, act locally”
Notable awards
E. Mead Johnson Award (1941)
Albert Lasker Award for Basic Medical Research (1948)
Pulitzer Prize in General Nonfiction (1969)
Cullum Geographical Medal (1975)
Tyler Prize for Environmental Achievement (1976)
René Jules Dubos (February 20, 1901 – February 20, 1982) was a French-born American microbiologist, experimental pathologist, environmentalist, humanist, and winner of the Pulitzer Prize for General Non-Fiction for his book So Human An Animal.[2] He is credited for having made famous Jacques Ellul’s environmental maxim, “Think globally, act locally” (penser global, agir local).[3]

Dubos devoted most of his professional life to the empirical study of microbial diseases and to the analysis of the environmental and social factors that affect the welfare of humans. His pioneering research in isolating antibacterial substances from certain soil microorganisms led to the discovery of major antibiotics. He performed groundbreaking research and wrote extensively on a number of subjects, including tuberculosis, pneumonia, and the mechanisms of acquired immunity, natural susceptibility, and resistance to infection. Aside from a period from 1942 to 1944 when he was George Fabyan Professor of Comparative Pathology and professor of tropical medicine at Harvard Medical School and Harvard School of Public Health, his scientific career was spent entirely at The Rockefeller Institute for Medical Research, later renamed The Rockefeller University.

In later years, Dubos explored the interplay of environmental forces and the physical, mental and spiritual development of mankind. The main tenets of his humanistic philosophy were: global problems are conditioned by local circumstances and choices, social evolution enables us to rethink human actions and change direction to promote an ecologically balanced environment, the future is optimistic since human life and nature are resilient and we have become increasingly aware of the dangers inherent in natural forces and human activities, and we can benefit from our successes and apply the lessons learned to solving other contemporary environmental problems.

Dubos is often attributed as the author of the popular maxim “Think Globally, Act Locally” that refers to the argument that global environmental problems can turn into action only by considering ecological, economic, and cultural differences of our local surroundings. This motto appeared for the first time in 1978, six years after Dubos served as advisor to the 1972 United Nations Conference on the Human Environment.[4] In 1979, Dubos suggested that ecological consciousness should begin at home. He urged creation of a world order in which “natural and social units maintain or recapture their identity, yet interplay with each other through a rich system of communications”. In the 1980s, Dubos held to his thoughts on acting locally, and felt that issues involving the environment must be dealt with in their “unique physical, climatic, and cultural contexts”. Dubos’ approach to building a resilient and constructive relationship between people and the Earth continues to resonate.[5]

For the academic years 1963–1964 and 1964–1965, he was a Fellow at the Center for Advanced Studies of Wesleyan University.[6] He served as chairman of the trustees of the René Dubos Center for Human Environment, a non-profit education and research organization that was dedicated in his honor in 1980. The mission of the center, which was co-founded by William and Ruth Eblen, is to “assist the general public and decision-makers in formulating policies for the resolution of environmental problems and the creation of environmental values.” Dubos remained actively involved with the Center until his death in 1982. He also served on the board of trustees of Science Service, now known as Society for Science & the Public, from 1949 to 1952.

Early life and career[edit]
Dubos was born in Saint-Brice-sous-Forêt, France, on February 20, 1901, and grew up in Hénonville, another small Île-de-France farming village north of Paris. His parents operated butcher shops in each of these villages.[7] He attended high school and the National Institute of Agronomy in Paris, and he received a Ph.D. from Rutgers University in 1927.[1] Dubos began his career in microbiology in 1927, when he joined Oswald Avery’s laboratory[8] at The Rockefeller Institute for Medical Research. Avery was looking for a microbe that could break down the polysaccharide capsule of a deadly strain of bacterial pneumonia in the same way that soil bacteria digested decaying organic matter in the woods. Dubos identified a bacterium that secreted an enzyme that broke down polysaccharide.[9] In 1939, with the help of Rockefeller Institute biochemist Rollin Hotchkiss, Dubos isolated the antibacterial agents tyrothricin and gramicidin from the bacterium Bacillus brevis that killed or inhibited Gram-positive bacteria and tested their bacterial, chemical, and clinical properties. These antibiotics remain in limited use today. In 1942, before antibiotics were in general use, Dubos warned that bacterial resistance should be expected.[10]
In 1948, Dubos shared the Albert Lasker Basic Medical Research Award with Selman Waksman for “their achievement in studies of the antibiotic properties of soil bacteria”.[11] A member of the National Academy of Sciences, he served as an editor of the Journal of Experimental Medicine from 1946 to 1972.
Legacy[edit]
• In 1998, the René Dubos Center for Human Environments donated a large portion of its environmental library and archives to Pace University. The collection consists of works by Dubos as well as those of other leading environmental scholars, some of which have been annotated by Dubos himself. According to Robert Chapman, professor of philosophy and coordinator of Pace’s Environmental Studies Program, “Pace now has many of Dubos’s own research books from the Rockefeller University, and this means that we can not only look at his writing, but we can also do an analysis of where his ideas come from and what influenced him.”
• In 1979, the René Dubos Center purchased 30 acres (120,000 m2) of land in North Castle, New York, with donations from foundations. As a condition of the purchase it agreed to keep the property in a natural state. Nevertheless, in 2002 it attempted to sell the land to developer Michael Cappelli, who planned to develop luxury homes there. The Center filed legal action in 2007 to attempt to complete this transaction; however, New York Attorney General Andrew Cuomo opposed the move, and the State Supreme Court ruled against the Center in that year. In 2009, the controversy was resolved when the Center agreed to sell the land to the village of Mount Kisco, New York.[12]
Awards and honors[edit]
• Recipient of the International Center in New York’s Award of Excellence.
Books[edit]
• The Bacterial Cell in its Relation to Problems of Virulence, Immunity and Chemotherapy, 1945, Harvard University Press
• Louis Pasteur, Free Lance of Science, 1950, 1960, Charles Scribner’s Sons, Da Capo Press 1986 reprint of 1960 edition: ISBN 0-306-80262-7
• The White Plague: Tuberculosis, Man, and Society, 1952, Little, Brown, and Company, Rutgers University Press 1987: ISBN 0-8135-1224-7
• Biochemical Determinants of Microbial Diseases, 1954, Harvard University Press
• Man, Medicine, and Environment, 1968, Praeger
• Mirage of Health: Utopias, Progress & Biological Change, 1959, Rutgers University Press 1987: ISBN 0-8135-1260-3
• Pasteur and Modern Science, 1960, Anchor Books, American Society of Microbiology edition with new chapter by Thomas D. Brock, 1998: ISBN 1-55581-144-2
• The Dreams of Reason: Science and Utopias, 1961 George B. Pegram lectures, Columbia University Press
• The Unseen World, 1962, The Rockefeller Institute Press
• The Torch of Life: Continuity in Living Experience, 1962, Simon and Schuster, Touchstone 1970 reprint: ISBN 0-671-20469-6
• Man Adapting, 1966, Yale University Press, ISBN 0-300-00437-0, enlarged edition 1980: ISBN 0-300-02581-5
• So Human an Animal: How We Are Shaped by Surroundings and Events, 1968, Scribner Book Company, Transaction Publishers 1998 edition: ISBN 0-7658-0429-8 (won the 1969 Pulitzer Prize for non-fiction)
• Reason Awake, 1970, Columbia University Press, ISBN 0-231-03181-5
• Only One Earth: The Care and Maintenance of a Small Planet, 1972, coauthored with Barbara Ward and United Nations Conference on the Human Environment, W W Norton & Co, ISBN 0-393-06391-7
• A God Within, 1973, Scribner, ISBN 0-684-13506-X
• Of Human Diversity, 1974, Clark University Press, ISBN 0-914206-24-9
• Beast or Angel: Choices That Make Us Human, 1974, Scribner, hardcover: ISBN 0-684-17608-4, paperback 1984: ISBN 0-684-14436-0
• The Professor, the Institute, and DNA: Oswald T. Avery, His Life and Scientific Achievements, 1976, Paul & Company, ISBN 0-87470-022-1
• The Wooing of Earth, 1980, Scribner, ISBN 0-684-16501-5
• Quest: Reflections on Medicine, Science, and Humanity, 1980, Harcourt Brace Jovanovich, ISBN 0-15-175705-4
• Celebrations of Life, 1981, McGraw Hill, ISBN 0-07-017893-3
• The World of René Dubos: A Collection from His Writings, 1990, Henry Holt & Co, ISBN 0-8050-1360-1
As editor[edit]
• LIFE Science Library, including authorship of one of its 26 volumes: Health and Disease (1965), with Maya Pines

Collected papers[edit]

The collected papers of Dubos from 1927–1982 including correspondence, lecture notes, book and article drafts, laboratory notebooks, photographs, audio and video cassettes, and films, are stored at the Rockefeller Archive Center.
References[edit]
1 ^ Jump up to: 
a b Montgomery, Paul L. (February 21, 1982). “Rene Dubos, Scientist And Writer, Dead”. The New York Times.
2 Jump up 
^ “The Pulitzer Prizes: General Nonfiction”. pulitzer.org. Retrieved 2014-10-07.
3 Jump up 
^ “Quotes Uncovered: The Real McCoy and Acting Locally”. Freakonomics. Retrieved 2015-06-15.
4 Jump up 
^ Moberg, Carol L. (2005). René Dubos, Friend of the Good Earth. ASM Press. pp. 160–163. ISBN 1-55581-340-2.
5 Jump up 
^ Revkin, Andrew C. (June 6, 2011). “A ‘Despairing Optimist’ Considered Anew”. The New York Times.
6 Jump up 
^ “Guide to the Center for Advanced Studies and Records, 1958–1969”. Wesleyan University. Retrieved 2014-10-07.
7 Jump up 
^ Hirsch, James G.; Moberg, Carol L. (1989). “René Jules Dubos”. Biographical Memoirs, Volume 58. National Academies Press.
8 Jump up 
^ Dubos, René (November 1, 1956). “Oswald Theodore Avery, 1877–1955”. Biographical Memoirs of Fellows of the Royal Society. 2: 35–48. doi:10.1098/rsbm.1956.0003.
9 Jump up 
^ “Gramicidin: Ushering in the Scientific Era of Antibiotic Discovery and Therapy”. Rockefeller University Hospital. Retrieved 2014-10-07.
10 Jump up 
^ Dubos, René (1942). “Microbiology”. Annual Review of Biochemistry. 11: 659–678. doi:10.1146/annurev.bi.11.070142.003303.
11 Jump up 
^ “1948 Winners”. laskerfoundation.org. Retrieved 2014-10-07.
12 Jump up 
^ “Attorney General Cuomo Approves Sale of Rene Dubos Property to Town of Mount Kisco, Protecting Open Space and Water Supply” (Press release). New York State Office of the Attorney General. June 4, 2009. Retrieved 2014-10-07.
External links[edit]
• Works by or about René Dubos in libraries (WorldCat catalog)
• National Academy of Sciences Biographical Memoir
• Frank Ryan, M.D., The Forgotten Plague: How the Battle Against Tuberculosis Was Won and Lost, 1992, Little Brown and Company, ISBN 0-316-76380-2 includes chapter on Dubos, puts his work in context of fight against TB.
René Dubos, Of Human Nature (1968)

Primary Care Best Practice

This post is about two important articles related to Primary Care Best Practice: One by Atul Gawande called “Big Med” and the other from Harvard Medical School about Physician Burnout.

As usual, Atul tells stories. His stories begin with his positive experience at the Cheesecake Factory and with his mother’s knee replacement surgery.

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Article by Atul Gawande Big Med and the Cheesecake Factory
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JCR NOTES

Article explores the potential for transferring some of the operational excellence of the Cheesecake Factory to aspects of health care.

He finds it tempting to look for 95% standardization and 5% customization.
He sees lessons in rolling out innovations through test kitchens and training that includes how to train others.
He sees heroes in doctors that push to articulate a standard of care, or technology, or equipment, or pharmaceutical.

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CREDIT: New Yorker Article by Atul Gawande “Big Med”

Annals of Health Care
August 13, 2012 Issue
Big Med
Restaurant chains have managed to combine quality control, cost control, and innovation. Can health care?

By Atul Gawande

Medicine has long resisted the productivity revolutions that transformed other industries. But the new chains aim to change this.Illustration by Harry Campbell

It was Saturday night, and I was at the local Cheesecake Factory with my two teen-age daughters and three of their friends. You may know the chain: a hundred and sixty restaurants with a catalogue-like menu that, when I did a count, listed three hundred and eight dinner items (including the forty-nine on the “Skinnylicious” menu), plus a hundred and twenty-four choices of beverage. It’s a linen-napkin-and-tablecloth sort of place, but with something for everyone. There’s wine and wasabi-crusted ahi tuna, but there’s also buffalo wings and Bud Light. The kids ordered mostly comfort food—pot stickers, mini crab cakes, teriyaki chicken, Hawaiian pizza, pasta carbonara. I got a beet salad with goat cheese, white-bean hummus and warm flatbread, and the miso salmon.

The place is huge, but it’s invariably packed, and you can see why. The typical entrée is under fifteen dollars. The décor is fancy, in an accessible, Disney-cruise-ship sort of way: faux Egyptian columns, earth-tone murals, vaulted ceilings. The waiters are efficient and friendly. They wear all white (crisp white oxford shirt, pants, apron, sneakers) and try to make you feel as if it were a special night out. As for the food—can I say this without losing forever my chance of getting a reservation at Per Se?—it was delicious.
The chain serves more than eighty million people per year. I pictured semi-frozen bags of beet salad shipped from Mexico, buckets of precooked pasta and production-line hummus, fish from a box. And yet nothing smacked of mass production. My beets were crisp and fresh, the hummus creamy, the salmon like butter in my mouth. No doubt everything we ordered was sweeter, fattier, and bigger than it had to be. But the Cheesecake Factory knows its customers. The whole table was happy (with the possible exception of Ethan, aged sixteen, who picked the onions out of his Hawaiian pizza).

I wondered how they pulled it off. I asked one of the Cheesecake Factory line cooks how much of the food was premade. He told me that everything’s pretty much made from scratch—except the cheesecake, which actually is from a cheesecake factory, in Calabasas, California.
I’d come from the hospital that day. In medicine, too, we are trying to deliver a range of services to millions of people at a reasonable cost and with a consistent level of quality. Unlike the Cheesecake Factory, we haven’t figured out how. Our costs are soaring, the service is typically mediocre, and the quality is unreliable. Every clinician has his or her own way of doing things, and the rates of failure and complication (not to mention the costs) for a given service routinely vary by a factor of two or three, even within the same hospital.

It’s easy to mock places like the Cheesecake Factory—restaurants that have brought chain production to complicated sit-down meals. But the “casual dining sector,” as it is known, plays a central role in the ecosystem of eating, providing three-course, fork-and-knife restaurant meals that most people across the country couldn’t previously find or afford. The ideas start out in élite, upscale restaurants in major cities. You could think of them as research restaurants, akin to research hospitals. Some of their enthusiasms—miso salmon, Chianti-braised short ribs, flourless chocolate espresso cake—spread to other high-end restaurants. Then the casual-dining chains reëngineer them for affordable delivery to millions. Does health care need something like this?

Big chains thrive because they provide goods and services of greater variety, better quality, and lower cost than would otherwise be available. Size is the key. It gives them buying power, lets them centralize common functions, and allows them to adopt and diffuse innovations faster than they could if they were a bunch of small, independent operations. Such advantages have made Walmart the most successful retailer on earth. Pizza Hut alone runs one in eight pizza restaurants in the country. The Cheesecake Factory’s major competitor, Darden, owns Olive Garden, LongHorn Steakhouse, Red Lobster, and the Capital Grille; it has more than two thousand restaurants across the country and employs more than a hundred and eighty thousand people. We can bristle at the idea of chains and mass production, with their homogeneity, predictability, and constant genuflection to the value-for-money god. Then you spend a bad night in a “quaint” “one of a kind” bed-and-breakfast that turns out to have a manic, halitoxic innkeeper who can’t keep the hot water running, and it’s right back to the Hyatt.

Medicine, though, had held out against the trend. Physicians were always predominantly self-employed, working alone or in small private-practice groups. American hospitals tended to be community-based. But that’s changing. Hospitals and clinics have been forming into large conglomerates. And physicians—facing escalating demands to lower costs, adopt expensive information technology, and account for performance—have been flocking to join them. According to the Bureau of Labor Statistics, only a quarter of doctors are self-employed—an extraordinary turnabout from a decade ago, when a majority were independent. They’ve decided to become employees, and health systems have become chains.

I’m no exception. I am an employee of an academic, nonprofit health system called Partners HealthCare, which owns the Brigham and Women’s Hospital and the Massachusetts General Hospital, along with seven other hospitals, and is affiliated with dozens of clinics around eastern Massachusetts. Partners has sixty thousand employees, including six thousand doctors. Our competitors include CareGroup, a system of five regional hospitals, and a new for-profit chain called the Steward Health Care System.

Steward was launched in late 2010, when Cerberus—the multibillion-dollar private-investment firm—bought a group of six failing Catholic hospitals in the Boston area for nine hundred million dollars. Many people were shocked that the Catholic Church would allow a corporate takeover of its charity hospitals. But the hospitals, some of which were more than a century old, had been losing money and patients, and Cerberus is one of those firms which specialize in turning around distressed businesses.

Cerberus has owned controlling stakes in Chrysler and gmac Financing and currently has stakes in Albertsons grocery stories, one of Austria’s largest retail bank chains, and the Freedom Group, which it built into one of the biggest gun-and-ammunition manufacturers in the world. When it looked at the Catholic hospitals, it saw another opportunity to create profit through size and efficiency. In the past year, Steward bought four more Massachusetts hospitals and made an offer to buy six financially troubled hospitals in south Florida. It’s trying to create what some have called the Southwest Airlines of health care—a network of high-quality hospitals that would appeal to a more cost-conscious public.

Steward’s aggressive growth has made local doctors like me nervous. But many health systems, for-profit and not-for-profit, share its goal: large-scale, production-line medicine. The way medical care is organized is changing—because the way we pay for it is changing.
Historically, doctors have been paid for services, not results. In the eighteenth century B.C., Hammurabi’s code instructed that a surgeon be paid ten shekels of silver every time he performed a procedure for a patrician—opening an abscess or treating a cataract with his bronze lancet. It also instructed that if the patient should die or lose an eye, the surgeon’s hands be cut off. Apparently, the Mesopotamian surgeons’ lobby got this results clause dropped. Since then, we’ve generally been paid for what we do, whatever happens. The consequence is the system we have, with plenty of individual transactions—procedures, tests, specialist consultations—and uncertain attention to how the patient ultimately fares.

Health-care reforms—public and private—have sought to reshape that system. This year, my employer’s new contracts with Medicare, BlueCross BlueShield, and others link financial reward to clinical performance. The more the hospital exceeds its cost-reduction and quality-improvement targets, the more money it can keep. If it misses the targets, it will lose tens of millions of dollars. This is a radical shift. Until now, hospitals and medical groups have mainly had a landlord-tenant relationship with doctors. They offered us space and facilities, but what we tenants did behind closed doors was our business. Now it’s their business, too.

The theory the country is about to test is that chains will make us better and more efficient. The question is how. To most of us who work in health care, throwing a bunch of administrators and accountants into the mix seems unlikely to help. Good medicine can’t be reduced to a recipe.

Then again neither can good food: every dish involves attention to detail and individual adjustments that require human judgment. Yet, some chains manage to achieve good, consistent results thousands of times a day across the entire country. I decided to get inside one and find out how they did it.

Dave Luz is the regional manager for the eight Cheesecake Factories in the Boston area. He oversees operations that bring in eighty million dollars in yearly revenue, about as much as a medium-sized hospital. Luz (rhymes with “fuzz”) is forty-seven, and had started out in his twenties waiting tables at a Cheesecake Factory restaurant in Los Angeles. He was writing screenplays, but couldn’t make a living at it. When he and his wife hit thirty and had their second child, they came back east to Boston to be closer to family. He decided to stick with the Cheesecake Factory. Luz rose steadily, and made a nice living. “I wanted to have some business skills,” he said—he started a film-production company on the side—“and there was no other place I knew where you could go in, know nothing, and learn top to bottom how to run a business.”

To show me how a Cheesecake Factory works, he took me into the kitchen of his busiest restaurant, at Prudential Center, a shopping and convention hub. The kitchen design is the same in every restaurant, he explained. It’s laid out like a manufacturing facility, in which raw materials in the back of the plant come together as a finished product that rolls out the front. Along the back wall are the walk-in refrigerators and prep stations, where half a dozen people stood chopping and stirring and mixing. The next zone is where the cooking gets done—two parallel lines of countertop, forty-some feet long and just three shoe-lengths apart, with fifteen people pivoting in place between the stovetops and grills on the hot side and the neatly laid-out bins of fixings (sauces, garnishes, seasonings, and the like) on the cold side. The prep staff stock the pullout drawers beneath the counters with slabs of marinated meat and fish, serving-size baggies of pasta and crabmeat, steaming bowls of brown rice and mashed potatoes. Basically, the prep crew handles the parts, and the cooks do the assembly.

Computer monitors positioned head-high every few feet flashed the orders for a given station. Luz showed me the touch-screen tabs for the recipe for each order and a photo showing the proper presentation. The recipe has the ingredients on the left part of the screen and the steps on the right. A timer counts down to a target time for completion. The background turns from green to yellow as the order nears the target time and to red when it has exceeded it.

I watched Mauricio Gaviria at the broiler station as the lunch crowd began coming in. Mauricio was twenty-nine years old and had worked there eight years. He’d got his start doing simple prep—chopping vegetables—and worked his way up to fry cook, the pasta station, and now the sauté and broiler stations. He bounced in place waiting for the pace to pick up. An order for a “hibachi” steak popped up. He tapped the screen to open the order: medium-rare, no special requests. A ten-minute timer began. He tonged a fat hanger steak soaking in teriyaki sauce onto the broiler and started a nest of sliced onions cooking beside it. While the meat was grilling, other orders arrived: a Kobe burger, a blue-cheese B.L.T. burger, three “old-fashioned” burgers, five veggie burgers, a “farmhouse” burger, and two Thai chicken wraps. Tap, tap, tap. He got each of them grilling.

I brought up the hibachi-steak recipe on the screen. There were instructions to season the steak, sauté the onions, grill some mushrooms, slice the meat, place it on the bed of onions, pile the mushrooms on top, garnish with parsley and sesame seeds, heap a stack of asparagus tempura next to it, shape a tower of mashed potatoes alongside, drop a pat of wasabi butter on top, and serve.

Two things struck me. First, the instructions were precise about the ingredients and the objectives (the steak slices were to be a quarter of an inch thick, the presentation just so), but not about how to get there. The cook has to decide how much to salt and baste, how to sequence the onions and mushrooms and meat so they’re done at the same time, how to swivel from grill to countertop and back, sprinkling a pinch of salt here, flipping a burger there, sending word to the fry cook for the asparagus tempura, all the while keeping an eye on the steak. In producing complicated food, there might be recipes, but there was also a substantial amount of what’s called “tacit knowledge”—knowledge that has not been reduced to instructions.

Second, Mauricio never looked at the instructions anyway. By the time I’d finished reading the steak recipe, he was done with the dish and had plated half a dozen others. “Do you use this recipe screen?” I asked.

“No. I have the recipes right here,” he said, pointing to his baseball-capped head.

He put the steak dish under warming lights, and tapped the screen to signal the servers for pickup. But before the dish was taken away, the kitchen manager stopped to look, and the system started to become clearer. He pulled a clean fork out and poked at the steak. Then he called to Mauricio and the two other cooks manning the grill station.

“Gentlemen,” he said, “this steak is perfect.” It was juicy and pink in the center, he said. “The grill marks are excellent.” The sesame seeds and garnish were ample without being excessive. “But the tower is too tight.” I could see what he meant. The mashed potatoes looked a bit like something a kid at the beach might have molded with a bucket. You don’t want the food to look manufactured, he explained. Mauricio fluffed up the potatoes with a fork.

I watched the kitchen manager for a while. At every Cheesecake Factory restaurant, a kitchen manager is stationed at the counter where the food comes off the line, and he rates the food on a scale of one to ten. A nine is near-perfect. An eight requires one or two corrections before going out to a guest. A seven needs three. A six is unacceptable and has to be redone. This inspection process seemed a tricky task. No one likes to be second-guessed. The kitchen manager prodded gently, being careful to praise as often as he corrected. (“Beautiful. Beautiful!” “The pattern of this pesto glaze is just right.”) But he didn’t hesitate to correct.

“We’re getting sloppy with the plating,” he told the pasta station. He was unhappy with how the fry cooks were slicing the avocado spring rolls. “Gentlemen, a half-inch border on this next time.” He tried to be a coach more than a policeman. “Is this three-quarters of an ounce of Parm-Romano?”

And that seemed to be the spirit in which the line cooks took him and the other managers. The managers had all risen through the ranks. This earned them a certain amount of respect. They in turn seemed respectful of the cooks’ skills and experience. Still, the oversight is tight, and this seemed crucial to the success of the enterprise.

The managers monitored the pace, too—scanning the screens for a station stacking up red flags, indicating orders past the target time, and deciding whether to give the cooks at the station a nudge or an extra pair of hands. They watched for waste—wasted food, wasted time, wasted effort. The formula was Business 101: Use the right amount of goods and labor to deliver what customers want and no more. Anything more is waste, and waste is lost profit.

I spoke to David Gordon, the company’s chief operating officer. He told me that the Cheesecake Factory has worked out a staff-to-customer ratio that keeps everyone busy but not so busy that there’s no slack in the system in the event of a sudden surge of customers. More difficult is the problem of wasted food. Although the company buys in bulk from regional suppliers, groceries are the biggest expense after labor, and the most unpredictable. Everything—the chicken, the beef, the lettuce, the eggs, and all the rest—has a shelf life. If a restaurant were to stock too much, it could end up throwing away hundreds of thousands of dollars’ worth of food. If a restaurant stocks too little, it will have to tell customers that their favorite dish is not available, and they may never come back. Groceries, Gordon said, can kill a restaurant.

The company’s target last year was at least 97.5-per-cent efficiency: the managers aimed at throwing away no more than 2.5 per cent of the groceries they bought, without running out. This seemed to me an absurd target. Achieving it would require knowing in advance almost exactly how many customers would be coming in and what they were going to want, then insuring that the cooks didn’t spill or toss or waste anything. Yet this is precisely what the organization has learned to do. The chain-restaurant industry has produced a field of computer analytics known as “guest forecasting.”

“We have forecasting models based on historical data—the trend of the past six weeks and also the trend of the previous year,” Gordon told me. “The predictability of the business has become astounding.” The company has even learned how to make adjustments for the weather or for scheduled events like playoff games that keep people at home.

A computer program known as Net Chef showed Luz that for this one restaurant food costs accounted for 28.73 per cent of expenses the previous week. It also showed exactly how many chicken breasts were ordered that week ($1,614 worth), the volume sold, the volume on hand, and how much of last week’s order had been wasted (three dollars’ worth). Chain production requires control, and they’d figured out how to achieve it on a mass scale.

As a doctor, I found such control alien—possibly from a hostile planet. We don’t have patient forecasting in my office, push-button waste monitoring, or such stringent, hour-by-hour oversight of the work we do, and we don’t want to. I asked Luz if he had ever thought about the contrast when he went to see a doctor. We were standing amid the bustle of the kitchen, and the look on his face shifted before he answered.
“I have,” he said. His mother was seventy-eight. She had early Alzheimer’s disease, and required a caretaker at home. Getting her adequate medical care was, he said, a constant battle.

Recently, she’d had a fall, apparently after fainting, and was taken to a local emergency room. The doctors ordered a series of tests and scans, and kept her overnight. They never figured out what the problem was. Luz understood that sometimes explanations prove elusive. But the clinicians didn’t seem to be following any coördinated plan of action. The emergency doctor told the family one plan, the admitting internist described another, and the consulting specialist a third. Thousands of dollars had been spent on tests, but nobody ever told Luz the results.

A nurse came at ten the next morning and said that his mother was being discharged. But his mother’s nurse was on break, and the discharge paperwork with her instructions and prescriptions hadn’t been done. So they waited. Then the next person they needed was at lunch. It was as if the clinicians were the customers, and the patients’ job was to serve them. “We didn’t get to go until 6 p.m., with a tired, disabled lady and a long drive home.” Even then she still had to be changed out of her hospital gown and dressed. Luz pressed the call button to ask for help. No answer. He went out to the ward desk.

The aide was on break, the secretary said. “Don’t you dress her yourself at home?” He explained that he didn’t, and made a fuss.

An aide was sent. She was short with him and rough in changing his mother’s clothes. “She was manhandling her,” Luz said. “I felt like, ‘Stop. I’m not one to complain. I respect what you do enormously. But if there were a video camera in here, you’d be on the evening news.’ I sent her out. I had to do everything myself. I’m stuffing my mom’s boob in her bra. It was unbelievable.”

His mother was given instructions to check with her doctor for the results of cultures taken during her stay, for a possible urinary-tract infection. But when Luz tried to follow up, he couldn’t get through to her doctor for days. “Doctors are busy,” he said. “I get it. But come on.” An office assistant finally told him that the results wouldn’t be ready for another week and that she was to see a neurologist. No explanations. No chance to ask questions.

The neurologist, after giving her a two-minute exam, suggested tests that had already been done and wrote a prescription that he admitted was of doubtful benefit. Luz’s family seemed to encounter this kind of disorganization, imprecision, and waste wherever his mother went for help.

“It is unbelievable to me that they would not manage this better,” Luz said. I asked him what he would do if he were the manager of a neurology unit or a cardiology clinic. “I don’t know anything about medicine,” he said. But when I pressed he thought for a moment, and said, “This is pretty obvious. I’m sure you already do it. But I’d study what the best people are doing, figure out how to standardize it, and then bring it to everyone to execute.”

This is not at all the normal way of doing things in medicine. (“You’re scaring me,” he said, when I told him.) But it’s exactly what the new health-care chains are now hoping to do on a mass scale. They want to create Cheesecake Factories for health care. The question is whether the medical counterparts to Mauricio at the broiler station—the clinicians in the operating rooms, in the medical offices, in the intensive-care units—will go along with the plan. Fixing a nice piece of steak is hardly of the same complexity as diagnosing the cause of an elderly patient’s loss of consciousness. Doctors and patients have not had a positive experience with outsiders second-guessing decisions. How will they feel about managers trying to tell them what the “best practices” are?

In March, my mother underwent a total knee replacement, like at least six hundred thousand Americans each year. She’d had a partial knee replacement a decade ago, when arthritis had worn away part of the cartilage, and for a while this served her beautifully. The surgeon warned, however, that the results would be temporary, and about five years ago the pain returned.

She’s originally from Ahmadabad, India, and has spent three decades as a pediatrician, attending to the children of my small Ohio home town. She’s chatty. She can’t go through a grocery checkout line or get pulled over for speeding without learning people’s names and a little bit about them. But she didn’t talk about her mounting pain. I noticed, however, that she had developed a pronounced limp and had become unable to walk even moderate distances. When I asked her about it, she admitted that just getting out of bed in the morning was an ordeal. Her doctor showed me her X-rays. Her partial prosthesis had worn through the bone on the lower surface of her knee. It was time for a total knee replacement.
This past winter, she finally stopped putting it off, and asked me to find her a surgeon. I wanted her to be treated well, in both the technical and the human sense. I wanted a place where everyone and everything—from the clinic secretary to the physical therapists—worked together seamlessly.

My mother planned to come to Boston, where I live, for the surgery so she could stay with me during her recovery. (My father died last year.) Boston has three hospitals in the top rank of orthopedic surgery. But even a doctor doesn’t have much to go on when it comes to making a choice. A place may have a great reputation, but it’s hard to know about actual quality of care.

Unlike some countries, the United States doesn’t have a monitoring system that tracks joint-replacement statistics. Even within an institution, I found, surgeons take strikingly different approaches. They use different makes of artificial joints, different kinds of anesthesia, different regimens for post-surgical pain control and physical therapy.

In the absence of information, I went with my own hospital, the Brigham and Women’s Hospital. Our big-name orthopedic surgeons treat Olympians and professional athletes. Nine of them do knee replacements. Of most interest to me, however, was a surgeon who was not one of the famous names. He has no national recognition. But he has led what is now a decade-long experiment in standardizing joint-replacement surgery.

John Wright is a New Zealander in his late fifties. He’s a tower crane of a man, six feet four inches tall, and so bald he barely seems to have eyebrows. He’s informal in attire—I don’t think I’ve ever seen him in a tie, and he is as apt to do rounds in his zip-up anorak as in his white coat—but he exudes competence.

“Customization should be five per cent, not ninety-five per cent, of what we do,” he told me. A few years ago, he gathered a group of people from every specialty involved—surgery, anesthesia, nursing, physical therapy—to formulate a single default way of doing knee replacements. They examined every detail, arguing their way through their past experiences and whatever evidence they could find. Essentially, they did what Luz considered the obvious thing to do: they studied what the best people were doing, figured out how to standardize it, and then tried to get everyone to follow suit.

They came up with a plan for anesthesia based on research studies—including giving certain pain medications before the patient entered the operating room and using spinal anesthesia plus an injection of local anesthetic to block the main nerve to the knee. They settled on a postoperative regimen, too. The day after a knee replacement, most orthopedic surgeons have their patients use a continuous passive-motion machine, which flexes and extends the knee as they lie in bed. Large-scale studies, though, have suggested that the machines don’t do much good. Sure enough, when the members of Wright’s group examined their own patients, they found that the ones without the machine got out of bed sooner after surgery, used less pain medication, and had more range of motion at discharge. So Wright instructed the hospital to get rid of the machines, and to use the money this saved (ninety thousand dollars a year) to pay for more physical therapy, something that is proven to help patient mobility. Therapy, starting the day after surgery, would increase from once to twice a day, including weekends.

Even more startling, Wright had persuaded the surgeons to accept changes in the operation itself; there was now, for instance, a limit as to which prostheses they could use. Each of our nine knee-replacement surgeons had his preferred type and brand. Knee surgeons are as particular about their implants as professional tennis players are about their racquets. But the hardware is easily the biggest cost of the operation—the average retail price is around eight thousand dollars, and some cost twice that, with no solid evidence of real differences in results.

Knee implants were largely perfected a quarter century ago. By the nineteen-nineties, studies showed that, for some ninety-five per cent of patients, the implants worked magnificently a decade after surgery. Evidence from the Australian registry has shown that not a single new knee or hip prosthesis had a lower failure rate than that of the established prostheses. Indeed, thirty per cent of the new models were likelier to fail. Like others on staff, Wright has advised companies on implant design. He believes that innovation will lead to better implants. In the meantime, however, he has sought to limit the staff to the three lowest-cost knee implants.

These have been hard changes for many people to accept. Wright has tried to figure out how to persuade clinicians to follow the standardized plan. To prevent revolt, he learned, he had to let them deviate at times from the default option. Surgeons could still order a passive-motion machine or a preferred prosthesis. “But I didn’t make it easy,” Wright said. The surgeons had to enter the treatment orders in the computer themselves. To change or add an implant, a surgeon had to show that the performance was superior or the price at least as low.

I asked one of his orthopedic colleagues, a surgeon named John Ready, what he thought about Wright’s efforts. Ready was philosophical. He recognized that the changes were improvements, and liked most of them. But he wasn’t happy when Wright told him that his knee-implant manufacturer wasn’t matching the others’ prices and would have to be dropped.

“It’s not ideal to lose my prosthesis,” Ready said. “I could make the switch. The differences between manufacturers are minor. But there’d be a learning curve.” Each implant has its quirks—how you seat it, what tools you use. “It’s probably a ten-case learning curve for me.” Wright suggested that he explain the situation to the manufacturer’s sales rep. “I’m my rep’s livelihood,” Ready said. “He probably makes five hundred dollars a case from me.” Ready spoke to his rep. The price was dropped.

Wright has become the hospital’s kitchen manager—not always a pleasant role. He told me that about half of the surgeons appreciate what he’s doing. The other half tolerate it at best. One or two have been outright hostile. But he has persevered, because he’s gratified by the results. The surgeons now use a single manufacturer for seventy-five per cent of their implants, giving the hospital bargaining power that has helped slash its knee-implant costs by half. And the start-to-finish standardization has led to vastly better outcomes. The distance patients can walk two days after surgery has increased from fifty-three to eighty-five feet. Nine out of ten could stand, walk, and climb at least a few stairs independently by the time of discharge. The amount of narcotic pain medications they required fell by a third. They could also leave the hospital nearly a full day earlier on average (which saved some two thousand dollars per patient).

My mother was one of the beneficiaries. She had insisted to Dr. Wright that she would need a week in the hospital after the operation and three weeks in a rehabilitation center. That was what she’d required for her previous knee operation, and this one was more extensive.
“We’ll see,” he told her.

The morning after her operation, he came in and told her that he wanted her getting out of bed, standing up, and doing a specific set of exercises he showed her. “He’s pushy, if you want to say it that way,” she told me. The physical therapists and nurses were, too. They were a team, and that was no small matter. I counted sixty-three different people involved in her care. Nineteen were doctors, including the surgeon and chief resident who assisted him, the anesthesiologists, the radiologists who reviewed her imaging scans, and the junior residents who examined her twice a day and adjusted her fluids and medications. Twenty-three were nurses, including her operating-room nurses, her recovery-room nurse, and the many ward nurses on their eight-to-twelve-hour shifts. There were also at least five physical therapists; sixteen patient-care assistants, helping check her vital signs, bathe her, and get her to the bathroom; plus X-ray and EKG technologists, transport workers, nurse practitioners, and physician assistants. I didn’t even count the bioengineers who serviced the equipment used, the pharmacists who dispensed her medications, or the kitchen staff preparing her food while taking into account her dietary limitations. They all had to coördinate their contributions, and they did.

Three days after her operation, she was getting in and out of bed on her own. She was on virtually no narcotic medication. She was starting to climb stairs. Her knee pain was actually less than before her operation. She left the hospital for the rehabilitation center that afternoon.

The biggest complaint that people have about health care is that no one ever takes responsibility for the total experience of care, for the costs, and for the results. My mother experienced what happens in medicine when someone takes charge. Of course, John Wright isn’t alone in trying to design and implement this kind of systematic care, in joint surgery and beyond. The Virginia Mason Medical Center, in Seattle, has done it for knee surgery and cancer care; the Geisinger Health Center, in Pennsylvania, has done it for cardiac surgery and primary care; the University of Michigan Health System standardized how its doctors give blood transfusions to patients, reducing the need for transfusions by thirty-one per cent and expenses by two hundred thousand dollars a month. Yet, unless such programs are ramped up on a nationwide scale, they aren’t going to do much to improve health care for most people or reduce the explosive growth of health-care costs.

In medicine, good ideas still take an appallingly long time to trickle down. Recently, the American Academy of Neurology and the American Headache Society released new guidelines for migraine-headache-treatment. They recommended treating severe migraine sufferers—who have more than six attacks a month—with preventive medications and listed several drugs that markedly reduce the occurrence of attacks. The authors noted, however, that previous guidelines going back more than a decade had recommended such remedies, and doctors were still not providing them to more than two-thirds of patients. One study examined how long it took several major discoveries, such as the finding that the use of beta-blockers after a heart attack improves survival, to reach even half of Americans. The answer was, on average, more than fifteen years.

Scaling good ideas has been one of our deepest problems in medicine. Regulation has had its place, but it has proved no more likely to produce great medicine than food inspectors are to produce great food. During the era of managed care, insurance-company reviewers did hardly any better. We’ve been stuck. But do we have to be?

Every six months, the Cheesecake Factory puts out a new menu. This means that everyone who works in its restaurants expects to learn something new twice a year. The March, 2012, Cheesecake Factory menu included thirteen new items. The teaching process is now finely honed: from start to finish, rollout takes just seven weeks.

The ideas for a new dish, or for tweaking an old one, can come from anywhere. One of the Boston prep cooks told me about an idea he once had that ended up in a recipe. David Overton, the founder and C.E.O. of the Cheesecake Factory, spends much of his time sampling a range of cuisines and comes up with many dishes himself. All the ideas, however, go through half a dozen chefs in the company’s test kitchen, in Calabasas. They figure out how to make each recipe reproducible, appealing, and affordable. Then they teach the new recipe to the company’s regional managers and kitchen managers.

Dave Luz, the Boston regional manager, went to California for training this past January with his chief kitchen manager, Tom Schmidt, a chef with fifteen years’ experience. They attended lectures, watched videos, participated in workshops. It sounded like a surgical conference. Where I might be taught a new surgical technique, they were taught the steps involved in preparing a “Santorini farro salad.” But there was a crucial difference. The Cheesecake instructors also trained the attendees how to teach what they were learning. In medicine, we hardly ever think about how to implement what we’ve learned. We learn what we want to, when we want to.

On the first training day, the kitchen managers worked their way through thirteen stations, preparing each new dish, and their performances were evaluated. The following day, they had to teach their regional managers how to prepare each dish—Schmidt taught Luz—and this time the instructors assessed how well the kitchen managers had taught.
The managers returned home to replicate the training session for the general manager and the chief kitchen manager of every restaurant in their region. The training at the Boston Prudential Center restaurant took place on two mornings, before the lunch rush. The first day, the managers taught the kitchen staff the new menu items. There was a lot of poring over the recipes and videos and fussing over the details. The second day, the cooks made the new dishes for the servers. This gave the cooks some practice preparing the food at speed, while allowing the servers to learn the new menu items. The dishes would go live in two weeks. I asked a couple of the line cooks how long it took them to learn to make the new food.

“I know it already,” one said.
“I make it two times, and that’s all I need,” the other said.
Come on, I said. How long before they had it down pat?
“One day,” they insisted. “It’s easy.”

I asked Schmidt how much time he thought the cooks required to master the recipes. They thought a day, I told him. He grinned. “More like a month,” he said.

Even a month would be enviable in medicine, where innovations commonly spread at a glacial pace. The new health-care chains, though, are betting that they can change that, in much the same way that other chains have.
Armin Ernst is responsible for intensive-care-unit operations in Steward’s ten hospitals. The I.C.U.s he oversees serve some eight thousand patients a year. In another era, an I.C.U. manager would have been a facilities expert. He would have spent his time making sure that the equipment, electronics, pharmacy resources, and nurse staffing were up to snuff. He would have regarded the I.C.U. as the doctors’ workshop, and he would have wanted to give them the best possible conditions to do their work as they saw fit.
Ernst, though, is a doctor—a new kind of doctor, whose goal is to help disseminate good ideas. He doesn’t see the I.C.U. as a doctors’ workshop. He sees it as the temporary home of the sickest, most fragile people in the country. Nowhere in health care do we expend more resources. Although fewer than one in four thousand Americans are in intensive care at any given time, they account for four per cent of national health-care costs. Ernst believes that his job is to make sure that everyone is collaborating to provide the most effective and least wasteful care possible.

He looked like a regular doctor to me. Ernst is fifty years old, a native German who received his medical degree at the University of Heidelberg before training in pulmonary and critical-care medicine in the United States. He wears a white hospital coat and talks about drips and ventilator settings, like any other critical-care specialist. But he doesn’t deal with patients: he deals with the people who deal with patients.

Ernst says he’s not telling clinicians what to do. Instead, he’s trying to get clinicians to agree on precise standards of care, and then make sure that they follow through on them. (The word “consensus” comes up a lot.) What I didn’t understand was how he could enforce such standards in ten hospitals across three thousand square miles.

Late one Friday evening, I joined an intensive-care-unit team on night duty. But this team was nowhere near a hospital. We were in a drab one-story building behind a meat-trucking facility outside of Boston, in a back section that Ernst called his I.C.U. command center. It was outfitted with millions of dollars’ worth of technology. Banks of computer screens carried a live feed of cardiac-monitor readings, radiology-imaging scans, and laboratory results from I.C.U. patients throughout Steward’s hospitals. Software monitored the stream and produced yellow and red alerts when it detected patterns that raised concerns. Doctors and nurses manned consoles where they could toggle on high-definition video cameras that allowed them to zoom into any I.C.U. room and talk directly to the staff on the scene or to the patients themselves.

The command center was just a few months old. The team had gone live in only four of the ten hospitals. But in the next several months Ernst’s “tele-I.C.U.” team will have the ability to monitor the care for every patient in every I.C.U. bed in the Steward health-care system.
A doctor, two nurses, and an administrative assistant were on duty in the command center each night I visited. Christina Monti was one of the nurses. A pixie-like thirty-year-old with nine years’ experience as a cardiac intensive-care nurse, she was covering Holy Family Hospital, on the New Hampshire border, and St. Elizabeth’s Medical Center, in Boston’s Brighton neighborhood. When I sat down with her, she was making her rounds, virtually.

First, she checked on the patients she had marked as most critical. She reviewed their most recent laboratory results, clinical notes, and medication changes in the electronic record. Then she made a “visit,” flicking on the two-way camera and audio system. If the patients were able to interact, she would say hello to them in their beds. She asked the staff members whether she could do anything for them. The tele-I.C.U. team provided the staff with extra eyes and ears when needed. If a crashing patient diverts the staff’s attention, the members of the remote team can keep an eye on the other patients. They can handle computer paperwork if a nurse falls behind; they can look up needed clinical information. The hospital staff have an OnStar-like button in every room that they can push to summon the tele-I.C.U. team.

Monti also ran through a series of checks for each patient. She had a reference list of the standards that Ernst had negotiated with the people running the I.C.U.s, and she looked to see if they were being followed. The standards covered basics, from hand hygiene to measures for stomach-ulcer prevention. In every room with a patient on a respirator, for instance, Monti made sure the nurse had propped the head of the bed up at least thirty degrees, which makes pneumonia less likely. She made sure the breathing tube in the patient’s mouth was secure, to reduce the risk of the tube’s falling out or becoming disconnected. She zoomed in on the medication pumps to check that the drips were dosed properly. She was not looking for bad nurses or bad doctors. She was looking for the kinds of misses that even excellent nurses and doctors can make under pressure.
The concept of the remote I.C.U. started with an effort to let specialists in critical-care medicine, who are in short supply, cover not just one but several community hospitals. Two hundred and fifty hospitals from Alaska to Virginia have installed a version of the tele-I.C.U. It produced significant improvements in outcomes and costs—and, some discovered, a means of driving better practices even in hospitals that had specialists on hand.
After five minutes of observation, however, I realized that the remote I.C.U. team wasn’t exactly in command; it was in negotiation. I observed Monti perform a video check on a middle-aged man who had just come out of heart surgery. A soft chime let the people in the room know she was dropping in. The man was unconscious, supported by a respirator and intravenous drips. At his bedside was a nurse hanging a bag of fluid. She seemed to stiffen at the chime’s sound.

“Hi,” Monti said to her. “I’m Chris. Just making my evening rounds. How are you?” The bedside nurse gave the screen only a sidelong glance.
Ernst wasn’t oblivious of the issue. He had taken pains to introduce the command center’s team, spending weeks visiting the units and bringing doctors and nurses out to tour the tele-I.C.U. before a camera was ever turned on. But there was no escaping the fact that these were strangers peering over the staff’s shoulders. The bedside nurse’s chilliness wasn’t hard to understand.

In a single hour, however, Monti had caught a number of problems. She noticed, for example, that a patient’s breathing tube had come loose. Another patient wasn’t getting recommended medication to prevent potentially fatal blood clots. Red alerts flashed on the screen—a patient with an abnormal potassium level that could cause heart-rhythm problems, another with a sudden leap in heart rate.

Monti made sure that the team wasn’t already on the case and that the alerts weren’t false alarms. Checking the computer, she figured out that a doctor had already ordered a potassium infusion for the woman with the low level. Flipping on a camera, she saw that the patient with the high heart rate was just experiencing the stress of being helped out of bed for the first time after surgery. But the unsecured breathing tube and the forgotten blood-clot medication proved to be oversights. Monti raised the concerns with the bedside staff.

Sometimes they resist. “You have got to be careful from patient to patient,” Gerard Hayes, the tele-I.C.U. doctor on duty, explained. “Pushing hard on one has ramifications for how it goes with a lot of patients. You don’t want to sour whole teams on the tele-I.C.U.” Across the country, several hospitals have decommissioned their systems. Clinicians have been known to place a gown over the camera, or even rip the camera out of the wall. Remote monitoring will never be the same as being at the bedside. One nurse called the command center to ask the team not to turn on the video system in her patient’s room: he was delirious and confused, and the sudden appearance of someone talking to him from the television would freak him out.
Still, you could see signs of change. I watched Hayes make his virtual rounds through the I.C.U. at St. Anne’s Hospital, in Fall River, near the Rhode Island border. He didn’t yet know all the members of the hospital staff—this was only his second night in the command center, and when he sees patients in person it’s at a hospital sixty miles north. So, in his dealings with the on-site clinicians, he was feeling his way.

Checking on one patient, he found a few problems. Mr. Karlage, as I’ll call him, was in his mid-fifties, an alcoholic smoker with cirrhosis of the liver, severe emphysema, terrible nutrition, and now a pneumonia that had put him into respiratory failure. The I.C.U. team injected him with antibiotics and sedatives, put a breathing tube down his throat, and forced pure oxygen into his lungs. Over a few hours, he stabilized, and the I.C.U. doctor was able to turn his attention to other patients.

But stabilizing a sick patient is like putting out a house fire. There can be smoldering embers just waiting to reignite. Hayes spotted a few. The ventilator remained set to push breaths at near-maximum pressure, and, given the patient’s severe emphysema, this risked causing a blowout. The oxygen concentration was still cranked up to a hundred per cent, which, over time, can damage the lungs. The team had also started several broad-spectrum antibiotics all at once, and this regimen had to be dialled back if they were to avoid breeding resistant bacteria.

Hayes had to notify the unit doctor. An earlier interaction, however, had not been promising. During a video check on a patient, Hayes had introduced himself and mentioned an issue he’d noticed. The unit doctor stared at him with folded arms, mouth shut tight. Hayes was a former Navy flight surgeon with twenty years’ experience as an I.C.U. doctor and looked to have at least a decade on the St. Anne’s doctor. But the doctor was no greenhorn, either, and gave him the brushoff: “The morning team can deal with that.” Now Hayes needed to call him about Mr. Karlage. He decided to do it by phone.

“Sounds like you’re having a busy night,” Hayes began when he reached the doctor. “Mr. Karlage is really turning around, huh?” Hayes praised the doctor’s work. Then he brought up his three issues, explaining what he thought could be done and why. He spoke like a consultant brought in to help. This went over better. The doctor seemed to accept Hayes’s suggestions.

Unlike a mere consultant, however, Hayes took a few extra steps to make sure his suggestions were carried out. He spoke to the nurse and the respiratory therapist by video and explained the changes needed. To carry out the plan, they needed written orders from the unit doctor. Hayes told them to call him back if they didn’t get the orders soon.

Half an hour later, Hayes called Mr. Karlage’s nurse again. She hadn’t received the orders. For all the millions of dollars of technology spent on the I.C.U. command center, this is where the plug meets the socket. The fundamental question in medicine is: Who is in charge? With the opening of the command center, Steward was trying to change the answer—it gave the remote doctors the authority to issue orders as well. The idea was that they could help when a unit doctor got too busy and fell behind, and that’s what Hayes chose to believe had happened. He entered the orders into the computer. In a conflict, however, the on-site physician has the final say. So Hayes texted the St. Anne’s doctor, informing him of the changes and asking if he’d let him know if he disagreed.

Hayes received no reply. No “thanks” or “got it” or “O.K.” After midnight, though, the unit doctor pressed the video call button and his face flashed onto Hayes’s screen. Hayes braced for a confrontation. Instead, the doctor said, “So I’ve got this other patient and I wanted to get your opinion.”
Hayes suppressed a smile. “Sure,” he said.

When he signed off, he seemed ready to high-five someone. “He called us,” he marvelled. The command center was gaining credibility.
Armin Ernst has big plans for the command center—a rollout of full-scale treatment protocols for patients with severe sepsis, acute respiratory-distress syndrome, and other conditions; strategies to reduce unnecessary costs; perhaps even computer forecasting of patient volume someday. Steward is already extending the command-center concept to in-patient psychiatry. Emergency rooms and surgery may be next. Other health systems are pursuing similar models. The command-center concept provides the possibility of, well, command.

Today, some ninety “super-regional” health-care systems have formed across the country—large, growing chains of clinics, hospitals, and home-care agencies. Most are not-for-profit. Financial analysts expect the successful ones to drive independent medical centers out of existence in much of the country—either by buying them up or by drawing away their patients with better quality and cost control. Some small clinics and stand-alone hospitals will undoubtedly remain successful, perhaps catering to the luxury end of health care the way gourmet restaurants do for food. But analysts expect that most of us will gravitate to the big systems, just as we have moved away from small pharmacies to CVS and Walmart.
Already, there have been startling changes. Cleveland Clinic, for example, opened nine regional hospitals in northeast Ohio, as well as health centers in southern Florida, Toronto, and Las Vegas, and is now going international, with a three-hundred-and-sixty-four-bed hospital in Abu Dhabi scheduled to open next year. It reached an agreement with Lowe’s, the home-improvement chain, guaranteeing a fixed price for cardiac surgery for the company’s employees and dependents. The prospect of getting better care for a lower price persuaded Lowe’s to cover all out-of-pocket costs for its insured workers to go to Cleveland, including co-payments, airfare, transportation, and lodging. Three other companies, including Kohl’s department stores, have made similar deals, and a dozen more, including Boeing, are in negotiations.

Big Medicine is on the way.
Reinventing medical care could produce hundreds of innovations. Some may be as simple as giving patients greater e-mail and online support from their clinicians, which would enable timelier advice and reduce the need for emergency-room visits. Others might involve smartphone apps for coaching the chronically ill in the management of their disease, new methods for getting advice from specialists, sophisticated systems for tracking outcomes and costs, and instant delivery to medical teams of up-to-date care protocols. Innovations could take a system that requires sixty-three clinicians for a knee replacement and knock the number down by half or more. But most significant will be the changes that finally put people like John Wright and Armin Ernst in charge of making care coherent, coördinated, and affordable. Essentially, we’re moving from a Jeffersonian ideal of small guilds and independent craftsmen to a Hamiltonian recognition of the advantages that size and centralized control can bring.

Yet it seems strange to pin our hopes on chains. We have no guarantee that Big Medicine will serve the social good. Whatever the industry, an increase in size and control creates the conditions for monopoly, which could do the opposite of what we want: suppress innovation and drive up costs over time. In the past, certainly, health-care systems that pursued size and market power were better at raising prices than at lowering them.
A new generation of medical leaders and institutions professes to have a different aim. But a lesson of the past century is that government can influence the behavior of big corporations, by requiring transparency about their performance and costs, and by enacting rules and limitations to protect the ordinary citizen. The federal government has broken up monopolies like Standard Oil and A.T. & T.; in some parts of the country, similar concerns could develop in health care.

Mixed feelings about the transformation are unavoidable. There’s not just the worry about what Big Medicine will do; there’s also the worry about how society and government will respond. For the changes to live up to our hopes—lower costs and better care for everyone—liberals will have to accept the growth of Big Medicine, and conservatives will have to accept the growth of strong public oversight.

The vast savings of Big Medicine could be widely shared—or reserved for a few. The clinicians who are trying to reinvent medicine aren’t doing it to make hedge-fund managers and bondholders richer; they want to see that everyone benefits from the savings their work generates—and that won’t be automatic.

Our new models come from industries that have learned to increase the capabilities and efficiency of the human beings who work for them. Yet the same industries have also tended to devalue those employees. The frontline worker, whether he is making cars, solar panels, or wasabi-crusted ahi tuna, now generates unprecedented value but receives little of the wealth he is creating. Can we avoid this as we revolutionize health care?

Those of us who work in the health-care chains will have to contend with new protocols and technology rollouts every six months, supervisors and project managers, and detailed metrics on our performance. Patients won’t just look for the best specialist anymore; they’ll look for the best system. Nurses and doctors will have to get used to delivering care in which our own convenience counts for less and the patients’ experience counts for more. We’ll also have to figure out how to reward people for taking the time and expense to teach the next generations of clinicians. All this will be an enormous upheaval, but it’s long overdue, and many people recognize that. When I asked Christina Monti, the Steward tele-I.C.U. nurse, why she wanted to work in a remote facility tangling with staffers who mostly regarded her with indifference or hostility, she told me, “Because I wanted to be part of the change.”

And we are seeing glimpses of this change. In my mother’s rehabilitation center, miles away from where her surgery was done, the physical therapists adhered to the exercise protocols that Dr. Wright’s knee factory had developed. He didn’t have a video command center, so he came out every other day to check on all the patients and make sure that the staff was following the program. My mother was sure she’d need a month in rehab, but she left in just a week, incurring a fraction of the costs she would have otherwise. She walked out the door using a cane. On her first day at home with me, she climbed two flights of stairs and walked around the block for exercise.

The critical question is how soon that sort of quality and cost control will be available to patients everywhere across the country. We’ve let health-care systems provide us with the equivalent of greasy-spoon fare at four-star prices, and the results have been ruinous. The Cheesecake Factory model represents our best prospect for change. Some will see danger in this. Many will see hope. And that’s probably the way it should be. ♦

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Article on Physician Burnout and Best Practice
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JCR Notes:

A primary care physician’s work includes vaccinations, screenings, chronic disease prevention and treatment, relationship building, family planning, behavioral health, counseling, and other vital but time-consuming work.

To be in full compliance with the U.S. Preventive Services Task Force recommendations, primary care physicians with average-sized patient populations need to dedicate 7.4 hours per day to preventative care alone. Taken in conjunction with the other primary care services, namely acute and chronic care, the estimated total working hours per primary care physician comes to 21.7 hours per day, or 108.5 hours per week.

“Complete Care” across 8500 physicians and 4.4 million members at SCPMG has four elements:

1. Share accountability:
share accountability for preventative and chronic care services (e.g., treating people with hypertension or women in need of a mammogram) with high-volume specialties.

2. Delegation:
One fundamental move was to transfer tasks from physicians — not just those in primary care — to non-physicians

3. Information technology
“Outreach team” manages information technologies that allowed patients to schedule visits from mobile apps, access online personalized health care plans (e.g., customized weight-loss calendars and healthy recipes), and manage complex schedules (e.g., the steps prior to a kidney transplant).

4. Standardized Care Process (see Atul Gawande Big Med)
“Proactive Office Encounter” (POE), ensures consistent evidence-based care at every encounter across the organization. At its core, the POE is an agreement of process and delegation of tasks between physicians and their administrative supports.

Glossary:
Medical assistants (MAs)
Licensed vocational nurses (LVNs)

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CREDIT HBR Case Study on SCPMG Primary Care Best Practice

How One California Medical Group Is Decreasing Physician Burnout
Sophia Arabadjis
Erin E. Sullivan
JUNE 07, 2017

Physician burnout is a growing problem for all health care systems in the United States. Burned-out physicians deliver lower quality care, reduce their hours, or stop practicing, reducing access to care around the country. Primary care physicians are particularly vulnerable: They have some of the highest burnout rates of any medical discipline.

As part of our work researching high-performing primary care systems, we discovered a system-wide approach launched by Southern California Permanente Medical Group (SCPMG) in 2004 that unburdens primary care physicians. We believe the program — Complete Care — may be a viable model for other institutions looking to decrease burnout or increase physician satisfaction. (While burnout can easily be measured, institutions often don’t publicly report their own rates and the associated turnover they experience. Consequently, we used physician satisfaction as a proxy for burnout in our research.)

In most health care systems, primary care physicians are the first stop for patients needing care. As a result, their patients’ needs — and their own tasks — vary immensely. A primary care physician’s work includes vaccinations, screenings, chronic disease prevention and treatment, relationship building, family planning, behavioral health, counseling, and other vital but time-consuming work.

Some studies have examined just how much time a primary care physician needs to do all of these tasks and the results are staggering. To be in full compliance with the U.S. Preventive Services Task Force recommendations, primary care physicians with average-sized patient populations need to dedicate 7.4 hours per day to preventative care alone. Taken in conjunction with the other primary care services, namely acute and chronic care, the estimated total working hours per primary care physician comes to 21.7 hours per day, or 108.5 hours per week. Given such workloads, the high burnout rate is hardly surprising.

While designed with the intent to improve quality of care, SCPMG’s Complete Care program also alleviates some of the identified drivers of physician burnout by following a systematic approach to care delivery. Comprised of 8,500 physicians, SCPMG consistently provides the highest quality care to the region’s 4.4 million plan members. And a recent study of SCPMG physician satisfaction suggests that regardless of discipline, physicians feel high levels of satisfaction in three key areas: their compensation, their perceived ability to deliver high-quality care, and their day-to-day professional lives.

Complete Care has four core elements:

Share Accountability with Specialists
A few years ago, SCPMG’s regional medical director of quality and clinical analysis noticed a plateauing effect in some preventative screenings where screenings rates failed to increase after a certain percentage. He asked his team to analyze how certain patient populations — for example, women in need of a mammogram — accessed the health care system. As approximately one in eight women will develop invasive breast cancer over the course of their lifetimes, a failure to receive the recommended preventative screening could have serious health repercussions.
What the team found was startling: Over the course of a year, nearly two-thirds of women clinically eligible for a mammogram never set foot in their primary care physician’s office. Instead they showed up in specialty care or urgent care.

While this discovery spurred more research into patient access, the outcome remained the same: To achieve better rates of preventative and chronic care compliance, specialists had to be brought into the fold.
SCPMG slowly started to share accountability for preventative and chronic care services (e.g., treating people with hypertension or women in need of a mammogram) with high-volume specialties. In order to bring the specialists on board, SCPMG identified and enlisted physician champions across the medical group to promote the program throughout the region; carefully timed the rollouts of different elements of the program pieces so increased demands wouldn’t overwhelm specialists; and crafted incentive programs whose payout was tied to their performance of preventative and chronic-care activities.

This reallocation of traditional primary care responsibilities has allowed SCPMG to achieve a high level of care integration and challenge traditional notions of roles and systems. Its specialists now have to respond to patients’ needs outside their immediate expertise: For example, a podiatrist will inquire whether a diabetic patient has had his or her regular eye examination, and an emergency room doctor will stitch up a cut and give immunizations in the same visit. And the whole system, not just primary care, is responsible for quality metrics related to prevention and chronic care (e.g., the percentage of eligible patients who received a mammogram).

In addition, SCPMG revamped the way it provided care to match how patients accessed and used their system. For example, it began promoting the idea of the comprehensive visit, where patients could see their primary care provider, get blood drawn, and pick up prescribed medications in the same building.

Ultimately, the burden on primary care physicians started to ease. Even more important, SCPMG estimates that Complete Care has saved over 17,000 lives.

Delegate Responsibility
“Right work, right people,” a guiding principle, helped shape the revamping of the organization’s infrastructure. One fundamental move was to transfer tasks from physicians — not just those in primary care — to non-physicians so physicians could spend their time doing tasks only they could do and everyone was working at the top of his or her license. For example, embedded nurse managers of diabetic patients help coordinate care visits, regularly communicate directly with patients about meeting their health goals (such as weekly calls about lower HbA1c levels), and track metrics on diabetic populations across the entire organization. At the same time, dedicated prescribing nurse practitioners work closely with physicians to monitor medication use, which in the case of blood thinners, is very time intensive and requires careful titration.

Leverage Technology

SCPMG invested in information technologies that allowed patients to schedule visits from mobile apps, access online personalized health care plans (e.g., customized weight-loss calendars and healthy recipes), and manage complex schedules (e.g., the steps prior to a kidney transplant). It also established a small outreach team (about four people) that uses large automated registries of patients to mail seasonal reminders (e.g., “it’s time for your flu vaccine shot”) and alerts about routine checkups (e.g., “you are due for a mammogram”) and handle other duties (e.g., coordinating mail-order, at-home fecal tests for colon cancer). In addition, the outreach team manages automated calls and e-mail reminders for the regions 4.4 million members.

Thanks to this reorganization of responsibilities and use of new technology, traditional primary care tasks such as monitoring blood thinners, managing diabetic care, and tracking patients eligibility for cancer screenings have been transferred to other people and processes within the SCPMG system.

Standardize Care Processes
The final element of Complete Care is the kind of process standardization advocated by Atul Gawande’s in his New Yorker article “Big Med.” Standardizing processes — and in particular, workflows — removes duplicative work, strengthens working relationships, and results in higher-functioning teams, reliable routines and higher-quality outcomes. In primary care, standardized workflows help create consistent communications between providers and staff and providers and patients, which allows physicians to spend more time during visits on patients’ pressing needs.
One such process, the “Proactive Office Encounter” (POE), ensures consistent evidence-based care at every encounter across the organization. At its core, the POE is an agreement of process and delegation of tasks between physicians and their administrative supports. It was originally developed to improve communications between support staff and physicians after SCPMG’s electronic medical record was introduced.
Medical assistants (MAs) and licensed vocational nurses (LVNs) are key players. A series of checklists embedded into the medical record guide their work both before and after the visit. These checklists contain symptoms, actions, and questions that are timely and specific to each patient based on age, disease status, and reason for his or her visit. Prior to the visit, MAs or LVNs contact patients with pre-visit instructions or to schedule necessary lab work. During the visit, they use the same checklists to follow up pre-visit instructions, take vitals, conduct medication reconciliation and prep the patient for the provider.

Pop-ups within the medical record indicate a patient’s eligibility for a new screening or regular test based on new literature, prompting the MAs or LVNs to ask patients for additional information. During the visit, physicians have access to the same checklists and data collected by the MAs or LVNs. This enables them to review the work quickly and efficiently and follow up on any flagged issues. After the visit with the physician, patients see an MA or LVN again and receive a summary of topics discussed with the provider and specific instructions or health education resources.

Contemporary physicians face many challenges: an aging population, rising rates of chronic conditions, workforce shortages, technological uncertainty, changing governmental policies, and greater disparities in health outcomes across populations. All of this, it could be argued, disproportionately affect primary care specialties. These factors promise to increase physician burnout unless something is done by health care organizations to ease their burden. SCPMG’s Complete Care initiative offers a viable blueprint to do just that.

Sophia Arabadjis is a researcher and case writer at the Harvard Medical School Center for Primary Care and a research assistant at the University of Colorado. She has investigated health systems in Europe and the United States.

Erin E. Sullivan is the research director of the Harvard Medical School Center for Primary Care. Her research focuses on high-performing primary care systems.

20th Century History on Health Care and Insurance

A historian’s take on health care and insurance in the US:

Key points:

Health care in the US is primarily driven by an “insurance company model”.’
There actually was a “medical marketplace” in early 20th century.
One of the best in that marketplace was a “prepaid physician group” with profit sharing for docs.
Truman proposed universal health care.
A.M.A. fought government intervention.
A.M.A. decided that the best way to keep the government out of their industry was to design a private sector model: the insurance company model.
In the insurance company model, insurance companies would pay physicians using fee-for-service compensation.
Thus, physicians became allied with insurance companies – both striving to keep government out of health care. Fee for service was their chosen model.
The model worked to expand coverage: from 25% of the population in 1945 to about 80 percent in 1965.
Elderly did not get covered as well. Congress stepped in with Medicare in 1965.
Because of rising prices, insurers gradually took over. “To constrain rising prices, insurers gradually introduced cost containment procedures and incrementally claimed supervisory authority over doctors. Soon they were reviewing their medical work, standardizing treatment blueprints tied to reimbursements and shaping the practice of medicine.”
Innovation in lacking. Concierge medicine experiments show some promise, like Atlas is Wichita.

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JCR comments:
It’s always easier looking backward. If only 25% of the population have health insurance, it seems eminently sensible that driving that number up to, say, 80% would be a high priority goal.

That’s what America did: it adopted a high priority goal to increase health insurance coverage from 25% to 80%. It’s chosen method was a fee-for-service reimbursement model – the “insurance model”. We put insurance companies in the driver’s seat, and we encouraged them to work with employers and physicians groups.

They were the middle man:

Insurers made sure that their employer clients had the benefits they needed to attract employees, at a cost that was practical.
Insurers also made sure that their physician partners supplied the services that they needed, at prices that were practical.

So, with the insurer-as-middle-man-model, we achieved our goal of enrolling 80%, up from 25%. 80% of the American population had health insurance in 1965.

So – what’s wrong with that?

It’s mostly very good. But…

Looking backward, it is obvious now that what is wrong: it is the remaining 20%. These are the unemployed – or the seniors – or the ones who have such ugly health attributes that their health costs are truly exorbitant.

While America was getting the 80% “squared away”, the 20% were left to fend for themselves. They overran emergency rooms; they took beds in charity hospitals; they died.

In 1965, we adopted Medicare and Medicaid. Medicare addressed the 20% who were seniors.
Medicaid addressed the 20% who were poor, such as:

Low-income families
Pregnant women
People of all ages with disabilities
People who need long-term care

Most of this happened over time, not in 1965. State offerings vary.

In 1997, we adopted CHIP for children. This addressed the 20% who were kids. 11 million kids got coverage. They were from families with too much income to qualify for Medicaid.

in 2003, we adopted MMA “The Medicare Prescription Drug Improvement and Modernization Act of 2003”. Under the MMA, private health plans were offered, approved by Medicare “Medicare Advantage Plans’. An optional prescription drug benefit was offered (“Part D”)

In 2011, the Affordable Care Act was adopted.

So, the key question for today is: why is our health care system such a mess. Read on:

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CREDIT: NYT https://www.nytimes.com/2017/06/19/opinion/health-insurance-american-medical-association.html?emc=edit_th_20170619&nl=todaysheadlines&nlid=44049881&_r=0

The Opinion Pages | OP-ED CONTRIBUTOR
How Did Health Care Get to Be Such a Mess?
By CHRISTY FORD CHAPINJUNE 19, 2017
The problem with American health care is not the care. It’s the insurance.
Both parties have stumbled to enact comprehensive health care reform because they insist on patching up a rickety, malfunctioning model. The insurance company model drives up prices and fragments care. Rather than rejecting this jerry-built structure, the Democrats’ Obamacare legislation simply added a cracked support beam or two. The Republican bill will knock those out to focus on spackling other dilapidated parts of the system.

An alternative structure can be found in the early decades of the 20th century, when the medical marketplace offered a variety of models. Unions, businesses, consumer cooperatives and ethnic and African-American mutual aid societies had diverse ways of organizing and paying for medical care.

Physicians established a particularly elegant model: the prepaid doctor group. Unlike today’s physician practices, these groups usually staffed a variety of specialists, including general practitioners, surgeons and obstetricians. Patients received integrated care in one location, with group physicians from across specialties meeting regularly to review treatment options for their chronically ill or hard-to-treat patients.

Individuals and families paid a monthly fee, not to an insurance company but directly to the physician group. This system held down costs. Physicians typically earned a base salary plus a percentage of the group’s quarterly profits, so they lacked incentive to either ration care, which would lose them paying patients, or provide unnecessary care.

This contrasts with current examples of such financing arrangements. Where physicians earn a preset salary — for example, in Kaiser Permanente plans or in the British National Health Service — patients frequently complain about rationed or delayed care. When physicians are paid on a fee-for-service basis, for every service or procedure they provide — as they are under the insurance company model — then care is oversupplied. In these systems, costs escalate quickly.

Unfortunately, the leaders of the American Medical Association saw early health care models — union welfare funds, prepaid physician groups — as a threat. A.M.A. members sat on state licensing boards, so they could revoke the licenses of physicians who joined these “alternative” plans. A.M.A. officials likewise saw to it that recalcitrant physicians had their hospital admitting privileges rescinded.

The A.M.A. was also busy working to prevent government intervention in the medical field. Persistent federal efforts to reform health care began during the 1930s. After World War II, President Harry Truman proposed a universal health care system, and archival evidence suggests that policy makers hoped to build the program around prepaid physician groups.

A.M.A. officials decided that the best way to keep the government out of their industry was to design a private sector model: the insurance company model.

In this system, insurance companies would pay physicians using fee-for-service compensation. Insurers would pay for services even though they lacked the ability to control their supply. Moreover, the A.M.A. forbade insurers from supervising physician work and from financing multispecialty practices, which they feared might develop into medical corporations.

With the insurance company model, the A.M.A. could fight off Truman’s plan for universal care and, over the next decade, oppose more moderate reforms offered during the Eisenhower years.

Through each legislative battle, physicians and their new allies, insurers, argued that federal health care funding was unnecessary because they were expanding insurance coverage. Indeed, because of the perceived threat of reform, insurers weathered rapidly rising medical costs and unfavorable financial conditions to expand coverage from about a quarter of the population in 1945 to about 80 percent in 1965.

But private interests failed to cover a sufficient number of the elderly. Consequently, Congress stepped in to create Medicare in 1965. The private health care sector had far more capacity to manage a large, complex program than did the government, so Medicare was designed around the insurance company model. Insurers, moreover, were tasked with helping administer the program, acting as intermediaries between the government and service providers.

With Medicare, the demand for health services increased and medical costs became a national crisis. To constrain rising prices, insurers gradually introduced cost containment procedures and incrementally claimed supervisory authority over doctors. Soon they were reviewing their medical work, standardizing treatment blueprints tied to reimbursements and shaping the practice of medicine.

It’s easy to see the challenge of real reform: To actually bring down costs, legislators must roll back regulations to allow market innovation outside the insurance company model.

In some places, doctors are already trying their hand at practices similar to prepaid physician groups, as in concierge medicine experiments like the Atlas MD plan, a physician cooperative in Wichita, Kan. These plans must be able to skirt state insurance regulations and other laws, such as those prohibiting physicians from owning their own diagnostic facilities.

Both Democrats and Republicans could learn from this lost history of health care innovation.

Christy Ford Chapin is an associate professor of history at the University of Maryland, Baltimore County, a visiting scholar at Johns Hopkins University and the author of “Ensuring America’s Health: The Public Creation of the Corporate Health Care System.”
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Brian Hudes Comment:

I saw this one, as well.  The author lost credibility for me.   Ironically, what the author clearly doesn’t realize is that she is making an argument for the Kaiser Permenante model.  However, she unfairly and without any data makes the following claim: 

“Where physicians earn a preset salary — for example, in Kaiser Permanente plans or in the British National Health Service — patients frequently complain about rationed or delayed care”

Here’s a more balanced and comprehensive assessment supported by third party research:

Health Care Members Speak

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