The Story That Every Entrepreneur Needs to Hear - By Webintelligency

One late afternoon, Grandpa and David sat together at the old wooden table on the balcony, watching the sun slide down behind the hills. David loved technology and startups, and that day he had a school assignment about business strategy. “Grandpa,” he began, “our teacher said Amazon Web Services is one of the most important business stories of our time. Could you tell me how it really started, not just the buzzwords?” Grandpa smiled, took a deep breath, and began his story.

“Back in the early 2000s,” Grandpa said, “Amazon had a severe problem that almost no customer could see. Inside the company, the software teams were moving quickly, always trying to build new features for the website, recommendation engines, search filters, new buttons, small experiments. But every time a team wanted to build something new, they ran into the same wall. Before they could write the code that customers would use, they had to spend most of their time on basic infrastructure work, the plumbing no one loved. They had to set up servers, configure storage, prepare databases, wire security, and write scripts to deploy everything. On average, about seventy percent of their effort went into this invisible plumbing, and only thirty percent went into the actual features that mattered to customers.”

David frowned. “So, they were wasting time on repeating the same technical tasks. That sounds like a process problem, like bad operations. Is that really the beginning of a great strategy story?” Grandpa nodded. “You’re already thinking like Michael Porter,” he said. “Porter explains that many managers confuse strategy with operational effectiveness.

Operational effectiveness is about performing similar activities better, faster, cheaper, with fewer mistakes. It is about adopting best practices or improving processes. Strategy, in contrast, is about choosing a unique way to compete, a distinctive position that delivers unique value to specific customers. Amazon’s problem was indeed operational: engineers were inefficient. But what makes this story strategic is how they decided to solve it.”

Grandpa leaned back, remembering the details. “Around 2003, Jeff Bezos and Andy Jassy looked closely at this internal mess. They knew that if Amazon wanted to grow, it could not stay stuck in a world where teams reinvented the same infrastructure repeatedly. So, they gathered senior leaders for a retreat at Bezos’s house. There, a central idea emerged. Just as a personal computer has an operating system that manages hardware and lets applications run on top, the internet needed its own ‘operating system’ for infrastructure. Instead of every team inside Amazon building their own servers and their own storage and their own messaging and security, they would turn these things into standardized services, well documented, accessible through APIs. A team would not build a database cluster; it would call a storage service. It would not write custom deployment scripts; it would call a compute service. It would not design new messaging from scratch; it would call a messaging service.”

David’s eyes lit up. “So, they created reusable building blocks, like Lego bricks, that every team could just plug into.” “Exactly,” Grandpa replied. “But here is where strategy appears. Porter says that real strategy is not a single project or a vague ambition like ‘we will be the best.’ Strategy is an integrated set of choices about how a business will compete and for whom it will create value. At the retreat, Bezos and Jassy realized that the same infrastructure services could serve not only Amazon’s own teams but also other companies around the world. And they made a crucial choice: unlike IBM or Oracle, who sold big systems to CIOs and CTOs through long, complex sales cycles, this new thing, which would become AWS, would target individual developers. The vision was simple and powerful. A single developer with a credit card, sitting anywhere on earth, could start a company on top of Amazon’s infrastructure. That was a distinctive position, a unique way to compete.”

David leaned forward, excited. “So that is the strategic choice: choose developers, not big corporate buyers, and make infrastructure as easy to use as a website. But what happened when they launched it?” Grandpa smiled. “In 2006, Amazon launched the first pieces: S3 for storage and later EC2 for computing. Customers could store data and rent computing power without buying hardware. The pricing model was pay‑as‑you‑gone. Instead of investing thousands of dollars upfront in servers, companies paid by the hour or by the gigabyte, just like electricity. What used to be an internal cost center, Amazon’s server capacity, became a public utility and a profit center. This is another place where Porter’s ideas help. He emphasizes the value proposition, which includes not only which customers you serve and what needs your address, but also the relative price you choose. AWS’s customers wanted flexibility, low upfront cost, and the ability to experiment. AWS offered exactly that through metered pricing.”

David paused, thinking. “But Porter also talks about industry structure and competitive position, and the five forces. Was AWS just lucky because no one else noticed this idea?” Grandpa shook his head. “It was not just luck, but timing did matter. In the early days, the ‘cloud infrastructure industry’ barely existed. Most organizations ran their own data centers. Managed hosting existed, but it did not offer the same elasticity or self‑service. To build a true global cloud platform, you needed huge capital, deep technical expertise, and the ability to convince customers to trust an external provider with their infrastructure. These were high barriers to entry. Meanwhile, traditional tech giants looked down on AWS. They saw it as a side project of a retailer, useful for startups, but not a real threat.”

David nodded. “So, in Porter’s five forces, the threat of new entrants was low because few could afford to build such a platform, and rivalry among comparable cloud providers was weak because there were hardly any. The substitutes were internal IT and traditional hosting.” Grandpa smiled. “Exactly. Porter teaches us that industry structure determines the general attractiveness of a business. Over the first years, AWS had an emerging industry structure with high barriers and limited rivalry. At the same time, AWS built a strong competitive position: it had a long head start, a growing set of services, and credibility with developers. Later, when Microsoft Azure and Google Cloud entered seriously, rivalry increased and the industry structure changed. But by then, AWS already had scale and a broad portfolio, which gave it an advantage.”

David tilted his head. “In class, our teacher said many managers think strategy means ‘our strategy is to be number one in the industry.’ Porter says that is wrong. Did Amazon fall into that trap?” Grandpa chuckled. “Bezos certainly wanted Amazon to succeed, but the AWS story is not about saying ‘we will be the best’ and stopping there. Porter insists that real strategy is concrete and specific. It is the pattern of choices that will create the competitive advantage needed to reach goals. In AWS’s case, the choices included targeting developers, using pay‑as‑you‑go pricing, building a constantly expanding catalogue of services, and designing the organization in a particular way. Notice how each of these is a choice about what to do and what not to do, about trade offs. Those trade offs make the position hard to copy.”

David thought for a moment, then asked, “Speaking of trade offs, how did AWS manage pricing over time? I heard they keep cutting prices. Isn’t that dangerous?” Grandpa nodded. “That is where another Porter idea comes in. He says strategy must involve trade offs. If you try to be everything to everyone, you lose focus and your activity system becomes incoherent. AWS accepted lower margins per unit in exchange for reaching massive scale and building a structural cost advantage. They built what they called a flywheel. Lower prices attracted more customers. More customers generated more usage. More usage justified investing in more data centers and more hardware. Greater scale and learning lowered AWS’s own costs for hardware, electricity, and operations. AWS then passed part of those savings back to customers as voluntary price cuts. Over the years, they reduced prices more than a hundred times. This constant motion strengthened both the growth of the industry and AWS’s position.”

David’s eyes widened. “And what about the different pricing tiers?” Grandpa answered, “AWS designed three main pricing tiers that matched different customer needs. On‑Demand instances offer maximum flexibility at the highest price per unit, perfect for unpredictable workloads and early experiments. Reserved Instances offer large discounts, sometimes around seventy percent, for customers willing to commit capacity for one or three years, which gives AWS predictable demand and helps it plan capital investments. Spot Instances sell spare capacity at very steep discounts, sometimes up to around ninety percent off, to customers ready to accept the risk that AWS might reclaim those resources with short notice. These tiers are part of the strategic design. They help fill the infrastructure efficiently and manage the trade off between price, predictability, and usage.”

David leaned back and then sat up again. “You said earlier that Porter distinguishes operational effectiveness from strategy. For most businesses, using AWS is best practice today. How does that fit the theory?” Grandpa replied, “For most AWS customers, moving to the cloud is indeed mainly an operational effectiveness decision. Instead of managing their own servers, they rent computing and storage. They reduce capital expenditures, improve flexibility, and often increase reliability. Porter would say this is adopting best practice, joining the frontier of productivity. There is nothing wrong with that, but it is different from the strategic move Amazon made. For Amazon, creating AWS was a decision to enter a new business, with a new value proposition, a different competitor set, and a distinct configuration of activities. That is business-level strategy, the kind Porter focuses on when he talks about how a particular business competes.”

David pressed on. “What about the internal organization you mentioned? I heard something about ‘Two‑Pizza Teams.’ Is that just a fun rule, or does it matter for strategy?” Grandpa laughed softly. “It sounds like a joke, but it was serious. As companies grow, communication lines multiply and coordination overhead explodes. Traditional IT organizations often separate planning, development, and operations into different departments, with countless handoffs and delays. AWS took a different approach. They adopted the rule that no internal team should be so large that two pizzas could not feed everyone, usually eight to ten people. Each team owned a service end‑to‑end: design, build, deployment, and operations. The mantra was ‘you build it, you run it.’ If something broke at night, the people who wrote the code were the ones who fixed it.”

David smiled. “So that creates strong ownership and fast feedback.” “Yes,” Grandpa said. “But in Porter’s language, the deeper point is fit. Strategy is not just a slogan or a single bold move. It is a system of activities that reinforce one another. Small autonomous teams could deploy changes independently and continuously. That allowed AWS to release hundreds of new features and services every year, while competitors worked through slower, centralized release cycles. The rapid pace of innovation strengthened the value proposition to developers. If you built on AWS, you were building on a platform that improved constantly. Organizational design, product design, pricing, and go‑to‑market formed a coherent whole. That coherence is what Porter calls fit, and it is one of the reasons a strategy is hard to copy.”

David looked thoughtful. “Our teacher also mentioned value chain and trade offs. How does AWS illustrate those?” Grandpa nodded. “Porter’s idea of the value chain is that a company creates value through a set of activities, from inbound logistics and operations to marketing, sales, and service. Competitive advantage can come from performing these activities at lower cost or in a unique way that supports differentiation. AWS’s value chain includes building and running data centers, designing hardware and software, pricing and billing, developer support, and enterprise sales. The decision to build custom hardware, like specialized chips, is part of deepening a structural cost advantage. The decision to keep interfaces standardized and self‑service, instead of doing heavy custom integration in every deal, is another trade off. These choices support the position of AWS as a scalable, general-purpose infrastructure utility rather than a consulting-heavy systems integrator.”

David raised another question. “You said industry structure changed over time. At first, startups used AWS, but later big companies and even governments joined. How did AWS deal with their fears about security and control?” Grandpa replied, “Many large, traditional organizations looked at AWS and thought, ‘This is fine for small startups, but we will never put our crown jewels there.’ To win those customers, AWS made further strategic moves. They built offerings like GovCloud and private regions, where infrastructure is physically and logically separated from the public internet. These regions were designed to meet extremely strict security and compliance requirements. A key moment was the CIA contract in 2013. When an intelligence agency agreed to run certain workloads on AWS, the symbolic impact was huge. Banks and other enterprises found it hard to argue that cloud was inherently unsafe after that.”

David nodded slowly. “So, AWS adjusted its activities to new demands without changing its core position.” “Exactly,” Grandpa said. “Porter warns that strategy can erode when firms chase every opportunity and abandon their focus. AWS added compliance features, dedicated network connections, support models for large enterprises, and specialized regions for governments. But it kept the core of its positioning: scalable infrastructure, pay‑as‑you‑go pricing, self‑service interfaces, and a constant stream of new services. In other words, AWS adapted to the changing industry structure but did not change who it was.”

David looked at Grandpa with a mixture of admiration and curiosity. “If you had to explain AWS’s strategy in Porter’s terms in just a few sentences, how would you do it?” Grandpa paused for a moment, choosing his words carefully. “I would say that AWS started from an internal operational problem and turned it into a new business with a unique strategic position. It chose to compete by being an internet ‘operating system’ for infrastructure, aimed at developers, with pay‑as‑you‑go pricing and self‑service access. It made clear trade offs: lower margins for scale and cost advantage, small autonomous teams instead of large, centralized ones, standard products instead of heavy customization. It built an activity system with strong fit, where organizational design, pricing, product scope, and go‑to‑market all reinforced the core position. It distinguished operational effectiveness from strategy, treating cloud adoption by customers as best practice but treating the creation of AWS as a strategic move.”

David smiled. “So, the real lesson is not just that AWS made a lot of money. It is that it became a living example of Porter’s ideas. Strategy is not about saying ‘we will be number one’ or ‘we will be innovative.’ It is about a coherent pattern of choices that define where you play and how you win, and about keeping those choices connected over time.” Grandpa nodded. “You understand it well,” he said. “AWS shows us that a story can start with boring internal plumbing and end with a powerful strategic position in a new, competitive industry. That is why your teacher chose it, and that’s why Porter’s theory is still so useful. When you look at any company, ask yourself: Are they just trying to be ‘the best,’ or have they chosen a distinctive way to compete?”

The sun finally dipped below the hills, leaving a warm glow in the sky. David looked down at his notebook, now full of ideas about AWS and Porter, and then back at Grandpa. “Thank you,” he said. “Now I do not just know the facts. I understand the story.” Grandpa smiled and patted his shoulder. “And remember,” he added softly, “the best strategies often begin with noticing a problem that everyone else accepts as normal, and then asking, like you did today, ‘Is these just operations, or could it be something more?’”

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