Amazon Strategic Analysis

Topics: Economics

The overview of Amazon. com Amazon. com is an e-commerce company from America. The company was found by Jeff Bezos in 1994 and was one of the first major companies to sell goods on the Internet. It began as a solely online bookstore. With years of successful development its main business diversified into many other products and services in a wide range. Today Amazon. com has become one of the biggest online retailers and web services provider in the world. The chart below shows the financial performance of Amazon in recent years.

From 2007 to 2011, the revenue increased dramatically in contrast with the net income. According the latest data revealed, by the end of 2012, Amazon’s revenue was over 61 billion US dollars. Under the strategy of internalization Amazon. com has developed separate websites for Canada, UK, Germany, France, China and so on. It also has many customer service centers and fulfillment & warehouses in many countries. Figure 1 [pic] Source from: http://healthcare. globaldata. com/expertinsightdetails. aspx? prid=985 This report is divided into a few sections.

The first section is to analyze Amazon’s strategic position through a deep research of its external environment. In this section, approaches like PESTLE and Porter’s Five Force Model are deployed to find out Amazon’s competitive environment. The second section is to investigate the internal environment of the company.

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The SWOT analysis tool will be used to present a clear picture of the company and its performance. The third section introduces the business model of Amazon and shows how the company performed in recent years and gets the strategic position of the company.

In the last section, all these analysis above are used to evaluate the suitability of Amazon’s corporate strategy, some real business cases and literature reviews are involved to get best criteria. The main purpose of this report is construct a link between the business environment and the strategy employed. To avoid the confusions brought from multiple markets and segments, in this report the strategy we analyzed will be in a corporate level. Considering the access to information and case timeliness, the time frame will be focus on 2007 to 2012. 1. 2 Amazon’s business model and primary business

As the pioneer on the Internet and online retailer, Amazon faced large potential opportunities and rapidly growing markets. In the beginning of 21 century, Amazon joined the booming of Internet industry with other great organizations like Google and Yahoo and launched to a rapidly expanding. Benefits from upsurge of internet sector stocks, Amazon raised a large amount of cash from share market and this ensured its expansion over the world. In addition, compared to traditional retailing, Amazon’s business model had clear competitive advantages, such as more reasonable price, more purchase convenience and larger variety of products.

Furthermore, Amazon also clearly secured the first-mover advantage. It has best reputation on the book retailing, mature logistic and supply chain, and large database and so on. In addition, Amazon’s business model was varying diversified due to its media channels; it could easily expand its product ranges to other products. The amazon. com business model assumes that the expanding number of Internet users will create a new mass market with value low prices and convenience. And they will shop for a large number of their needs using the computer. By removing the overheads of a traditional bricks-and-mortar store amazon. om is able to reduce the costing and so charge customers at lower prices. Amazon has three main distinct businesses: Amazon retail; Amazon marketplace and Amazon web services (Edwards, Lisa, 2013). Amazon retail started from online bookstore and then expanded to many other products like electronics. Amazon marketplace is a third-party selling platform which allows individuals to sell goods and services online. Moreover, this online marketplace also has some other functions like fulfillment and Amazon check out, which is similar with the PayPal. Amazon web service is an integration of leveraged technology developed by Amazon.

They are mainly based on its online retail platform and offer customers web services like Amazon Cloudwatch and Amazon CloudFront. In the environment analysis (PESTLE and Porter’s Five Forces) we mainly focus on Amazon retail business. Strategic position of Amazon The external environment is referred as the macro-environment. This includes the broad environmental factors which affects organizations at various levels. It is important to consider the potential impact of the external factors on the individual organizations (Johnsonet al, 2006, P65).

To have a deeply understanding on Amazon’s strategic position, we firstly analyze its external environment of the company through the PESTEL model. Jeff Bezos, CEO and founder of Amazon, his expectation to his company is not just profits. According to the mission statement of the group, customer centric and technological innovation seems to be the priorities of his business. Amazon desires to be “Earth’s most customer centric company”. And this determines that Amazon’s strategic position will be more concentrate on the growth of the group and enable it to be a great enterprise rather than a money maker. . 1 PESTLE analysis PESTEL analysis is used to identify how future trends in the political, economical, social, technological environments might influence an organization (Johnsonet al, P65). Those drivers of change in these aspects will be found out and their impacts on more than the industry will be identified. Political factors: Promotions from government are essential to the Internet industry. From 21 century, the USA government started high investment to the national infrastructures and this leads to the boom of the development of Internet industry over the world.

This stimulates the number of personal computers and connection with networks globally. More and more people around the world today have opportunities to shopping on the internet and spend hours of their daily time on it. The construction of network and increasing transportation between countries means that a consumer from UK could choose purchase goods from an American online retailer. The telecom liberalization promotes faster and better access for national users to websites in other countries. And with the spread of the construction of Internet, more and more consumers from developing countries have chances to browse the Amazon. om and purchase on it. This has positive impacts on Amazon’s globalization and international expansion. However, restrictive policies in some countries may limit the operation of the Amazon especially in international expansion. For example, Google. com is banned in China since governmental decision arguing that it threats the community and national market with inappropriate content. Some region protective polices also pose obstacles for Amazon in its international expansion. These problems need been taken consideration in Amazon’s globalization strategy and should been avoided.

Economic factors One significant benefit brought from the economy development is the increasing disposable income in recent decades. Even though the world economy was attacked by the financial crisis and downturn, the developing countries, mainly China and India, provide more potential and real purchasing power for the e-retailing industry. Amazon. com had expanded its business into these two countries with insufficient attention. The strategy direction under this trend is recommended that to put more attention for those growing markets and to adjust their marketing strategies.

The fluctuant interest rate is another factor effecting Amazon’s business and profits. Today the credit card use is more and more popular and more acceptable by e-retailing merchants. Meanwhile the installment is welcome to those consumers who have less cash. When consumers decide to pay in installment, they usually have to pay extra fees in a fixed interest rate which refer to the current bank rate. Therefore the changing interest rate could obviously influence consumers’ outcome and profits of merchants. For Amazon, the expectation of the future interest rate is an important tool in its products pricing and payment scheme.

Exchange rate Since Amazon is a US-based company, if the U. S. dollar weakens against foreign currencies, transactions conducted in foreign currency denominations will increase and inflate revenues, operating expenses, and net income. Moreover, one of Amazon’s corporate strategies are profit from lower pricing and large volume, which means the fluctuation of exchange rate could extremely influence Amazon’s pricing management. Social-cultural factors Figure 2 [pic] Source: gesterling. wordpress. com. From: http://webscience. org/web-observatory/about/tracking-explosive-growth/

Data from Webscience. org indicates that growth of internet from 2004, the users internet increased dramatically by over 2 billion and this period is called social web stage. The social web media users including Facebook and Twitters account large amount of the population. This creates a new channel for promotion. It is good news for Amazon to expand their business and develop related marketing promotion through this new channel. Collaborations with these new social web like facebook and twitter means seizing huge potential customers and wider promotion chain.

This part will be more detailed introduced in later SWOT analysis sector. Other cultural factors which play significant effects on Amazon’s operation is the habits of shopping online for public. In past, e-business sounds like a high-tech thing and is far away from public consumers. In 1996, the marketing and internet teams from IBM coined the term “e-business” and defined it as “the application of information and communication technologies (ICT) in support of all the activities of business”. At beginning this kind of business activities are acceptable in high-tech industries and more popular between companies.

With the development of internet and population of personal computer use, today all sectors especially individuals have been the main users in this business activities. The B2C or C2C business models could be seen everywhere in today’s online retailing and the awareness of shopping online is common and usual in our daily lives. Technological factors As mentioned before, from 1990s, the information evolution stimulated the science boom in the internet industry and this changed the communication forms of human beings. There is an increase in broadcasting, information and telecommunication technologies for internet access.

Individuals today are more easy to receive information through Internet and they also search things and information on the web. This provides Amazon initials to set up a platform to carry out their business and web services. In addition, the trend of computerized office enables those big groups to seek web services from high-tech companies like IBM and Cisco. Amazon has first move advantages in this area. In 2002, Amazon launched Amazon Web Service (AWC) which provides programmatic access to latent features on its website. The demands of this kind of service help Amazon expand its business from traditional e-retailer to a wider market.

And this part will be presented in later SWOT analysis. Environmental factors Power resource shortage It is well known that the global climate crisis has been a serious problem today and one of the most reasons for this problem is pollution from transportations like vehicle and bus. The lack of energy power like petrol and diesel also restricts people’s daily outdoor activities in a certain range. And these problems play positive effects on the e-retailing industry since customers can do purchasing before a computer. They do not need to drive miles to a super market in the town center.

The convenience and energy saving makes certain influences when consumers doing a weekend purchasing. Customers are more concerned about whether their orders could arrive safely and timely. Therefore it is important for Amazon to improved their fulfillment center and logistic channel to provide best customer satisfaction and to reinforce their leadership in this industry. Legal factors There is no uniform regulations governing e-commerce in USA and UK but some related regulations like Data Protection Act in UK and Federal Trade Commission in USA may impact potential risk in Amazon’s operations, especially in its AWC web services.

The mass surveillance scandal occurred in 2013 which is leaded by CIA and NSA in America. Although this kind of secret surveillance programs are always away from public eyes those international internet companies like Google could be involved in such sensitive cases. Amazon needs be aware of this kind of cases and at least keeps out from an affair. In addition, bad news revealed months before is that for Amazon in its China market is that the Chinese government may take actions to charge e-retailers taxes for their online transactions. China government had no clear tax payment act against the online purchase before.

This will obviously influence those e-retailers in China market since they have to pay extra money if they still want a competitive pricing. For Amazon, it has to change its overall marketing strategy to prepare the future. Summary of PESTEL The analysis of PESTLE indicates an increasing and attractive market to be exploited by Amazon. The key drivers of changes enable Amazon to reposition its strategy in different levels. The increasing number of computer users means huge potential customers of its e-retailer business. The use of internet as a social networking channel has created new opportunities to be exploited.

The global nature of Amazon’s activities also suggests that strategies developed should comply with the different legal obligations internationally. The possible regulations acted by Chinese government means Amazon has to change marketing strategies in its penetration to this huge market. 2. 2 Industry and competitive environment analysis — Porter’s Five Forces Model In this section, the operating environment will be taken a closer look at the e-retailer industry, to be more specific, the online bookstore and electronics industry which Amazon is mainly involved.

The analysis is based on Michael Porter’s (1980) Five-Force model. Porter’s five forces consist of entry, threat of substitution, bargaining power of buyers, bargaining power of suppliers and rivalry among current competitors. These five forces jointly determine the intensity of competition within the industry and in turn help firms to set their strategies. We will use the proposed Porter’s “five forces model” to the state of competition on the e-retailing industry analysis in order to understand the the intensity of competition. Threat of new entrant

Threat of new entrants is low. It would be virtually impossible for a new company to reach the magnitude of inventory and status that Amazon. com maintains. Amazon. com has been in the internet marketplace for about thirteen years now- it would be extremely difficult for a start-up company in the industry to raise enough capital to even compete with Amazon. com on a lower level. Figure 3 [pic] Source: gesterling. wordpress. com Although the cost to set up a new online bookstore is not high and more and more big traditional merchants try to enter this market today.

To following the trend of shopping online, even those supermarkets like Tesco could set up a similar website to compete with Amazon. However, Amazon has been in the internet marketplace for more than thirteen years and it has extremely built its first move advantages. Few competitors could raise enough capital to even compete with Amazon in a high level. Amazon also built its brand recognition in American and UK markets. Brand Recognition and customer loyalty may also make it difficult for a new entrant to compete.

The mature technology platform, long tested web structure, mature supply chain and distribution chain, all of these construct barriers for new entrants to compete with Amazon (Harry M; Cristina L, 2009) . However, in some countries Amazon does not have its first move advantages. For example, in China the Dangdang. com is the first online bookstore and Taobao. com is the biggest online retailer. Amazon is late to enter this big market and lost its competitive advantages. So it is high threats from new entrants for Amazon in Chinese market and other countries which Amazon has not entered in early. Bargaining power of buyers

The bargaining power of buyers is relatively high. Due to thousands of e-retailers existing in the internet, Amazon’s customers have options to compare and choose which one is better. The price of books and electronic products today is transparent on the web. It means the cheaper price you offer, the more preferable customers you own. Fortunately since Amazon does not operate its physical retailers, it has lowered overheads cost and could pass these savings along to customers in the form of lower prices. Moreover, the quality of products is another important factor to affect customers’ purchasing.

Thanks to the long-tested operations, Amazon enjoys a better reputation and good recognition in the online book retailing. When sometimes the Amazon’s price is equal to or even higher than other retailers, customer may choose Amazon in consideration of its better reputation. Bargaining power of supplier Amazon. com Inc 2011 Annual report acknowledges the impact the supplier possess, since the company “does not have long-term arrangements with most of its suppliers to guarantee availability of merchandise or services”. Bargaining power of supplier is relatively high in their electronic business sector.

Amazon’s Low Cost strategy has made it difficult for it to buy electronic products in lower prices from distributors since today more and more brands have set up their own direct sale store online. Threat of product substitute With the population of mobile and high integration of personal terminal devices, customers receive information more easily; this is not a good news for the book sale on Amazon’s online bookstore. Threats from iTunes and iBook also effect e-books and CD/DVD sales in the Kindles. Moreover, physical bookstores have an established brand in their “brick and mortar” business.

Customers may not be satisfied with the shopping experience. In addition, with the technology developing, people’s reading habit may get changed and this could certainly influence Amazon’s traditional book sales. Intensity of competitors Resulted from Amazon’s diversification strategy, its products portfolio is covering many industries like books, electronics and other goods. Therefore Amazon faces high rivalry from competitors in different industries. In the electronic products sector, Amazon does not enjoy a success in the market. The serious problem of privacy leads Amazon’s CD and DVD products’ poor sales.

With more and more brands set up their own direct-sale store on the internet, those digital products like PC and camera in Amazon can not keep its price advantage. Figure 4 [pic] Source: gigaom. com , from: http://gigaom. com/2010/09/24/e-book-numbers-hint-at-amazon-domination/ Amazon owns unique competitive advantages in its online bookstore markets especially in the e-book segment. In this sector, Kindle, an electronic reading device developed by Amazon needs to be analyzed. This device was unveiled in 2007 and it enabled customers to download book, magazine, newspaper and blogs.

There are over 90 thousand books available in the Kindle in the beginning. By 2008 Kindle became a top selling product in Amazon’s electronic products and over 190 thousand books are available (Gary J. Stockport, 2009). The chart above shows the market share of Kindle in e-book segment. Kindle built a tight connections between readers and Amazon and it provides more potential customers for Amazon retailer. Kindle has been an important tool for Amazon reinforcing its leader position in the online bookstore. 2. 3 Internal environment analysis- SWOT Strengths Cost leadership strategy. Amazon has mature systems to control its cost and o deliver customers lower prices with better quality than competitors do. No overhead cost of physical retailer and high bargaining power to suppliers enables Amazon to maintain price advantages against competitors. Efficient logistics and distribution. Amazon has a number of fulfillment warehouses in each market it operates. The warehouses are geographically spread in each country so the goods could be dispatched faster and with lower cost. Advanced technology. Amazon invests lot of money in technology development including long tested platform and superior web services for customers. Weaknesses No physical store.

Although this could brings less cost, no physical store may caused Amazon to lose a number of customers who prefer doing shopping in physical stores. The large budget on R&D program and platform running. It needs a lot of money to keep the running of Amazon’s platform. And some of high technology results can not achieve to be profitable in the short term. Opportunities Amazon marketplace payment system. The payment system provides Amazon a fixed financial tool and cash to expand its business. Access to more brands and products. Amazon could benefit from a wide range of products and brands through its marketplace and online retailer platform.

Increasing services and product portfolio through acquisitions. Amazon expands its business through acquisitions to other industries. The skills and business acquired from alliance help Amazon reach a diversification goal. The mature logistics and distribution channel. The construction of its own logistics and distribution channels not only builds an efficient shipping but also provides opportunities to easier access to other industries. Rise of social web. The sharply rise of social web like Facebook and Twitter provides Amazon a more efficient media channel to its market promotion. Threats Online transaction fraud.

Amazon stores its online shoppers’ personal information, such as bank account details, which might lead to payment fraud. And the Amazon marketplace business could also be maliciously used by some merchants. Negative actions from governments. Governments may set up actions to charge tax for e-retailer merchants, for example in Chinese market. And the e-retailer platform may be used to tax avoidance by some users. Suitability of Amazon’s corporate strategies In this section, the strategic position based on Amazon’s business environment analysis will be deployed to evaluate the suitability of Amazon’s strategy in corporate level.

To make objective and rational judgment, some Amazon’s corporate strategies which reflected in its particular business activities will be identified. Corporate-level strategy is concerned with the “overall purpose and scope of an organization and how value will be added to the different parts of the organization” (Jim Riley, 2011). It means corporate strategies are used to plan the long-term direction for the organization as a whole; it deals with capabilities including financial capital, human resources and R&D sources. Amazon states its mission as to be “Earth’s most customer centric company”.

In this section, three main corporate strategies will be described and their suitablilties based on strategic positions will evaluated. If not suitable, some recommendations will be developed. 3. 1 Growth through lower cost structure and lower prices. In a letter to customers Jeff Bezos (CEO and founder of Amazon) states his corporate goals: “There are two types of companies: those that work hard to charge customers more and those that work hard to charge customers less. Both approaches can work. We are firmly in the second camp”. Deliver best value to customers is one of the core strategies of Amazon to make it success.

Figure 5 [pic] Source: www. amazon. co. uk , from: http://www. amazon. co. uk/b? ie=UTF8&node=2610308031 The figure above shows Amazon’s core strategy and its business model. The lower prices and better services could be the best feedback to customers and these welfares have to be based on its lower cost structure. Amazon is well known as the cost leadership in the industry and it certainly delivers customers lower price and better service. The goal of cost leadership strategy is to produce products and services with a lower cost than the competitors do.

It seems like only a company possessing customer centric could survive in today’s marketing orientation environment in any cases. To reach customers satisfaction, Amazon not only provides lower prices but also pushes off serious of promotion. Kindle is good example welfare bringing benefits to customers. As introduced in the Five Forces analysis before, Kindle brings convenience and benefits for readers around the world and profits Amazon by attracting numbers of potential customers. Another successful tool developed by Amazon is Prime.

A brief introduction of Prime is: Paying $79 annually, customers get unlimited movie and TV streaming, one free borrowed e-book per month, and automatic two-day shipping on nearly everything you buy (Amazon. com, 2008). At the beginning, Amazon provided free Prime promotion when purchasing of the company’s bestselling Kindle Fire. And this made the Prime members dramatically increase to 10 million by 2012 (Consumer Intelligence Research Partners (CIRP). Prime created a $79 switch costs for customers if they chose to shop elsewhere. Reports from CIRP (2012) also found that, those

Prime members annually spent more than twice as much on average ($1,224) than non-Prime customers ($505). Adding in the $79 membership fee, Prime members brought nearly $800 more in sales per customer to Amazon. And adding cost of those benefits like unlimited movie and TV streaming, Prime members brought far more $79 profits to Amazon and they also benefited from this Prime project. It is a win-win situation for both Amazon and customers. Most Amazon’s promotions are effective and really bring customers benefits. However sometimes wrong forms of promotion could negatively impact a company’s marketing strategy.

As analyzed in the PESTLE sector, in some countries where Amazon is late to enter, Amazon’s lower price strategy is not suitable for these markets. Since Amazon does not have its own physical store, it is difficult for Amazon to compete with those local brands. The excessive price strategy might cause a price war, which may result in a cut-throat competition. If Amazon does not have the first move advantage in an international expansion, the better pricing strategy is not simply lower than its competitors. Since Amazon is an international organization over the world, it is easily affected by the fluctuation of the exchange rate.

In the PESTLE analysis, it analyses the fluctuation of exchange rate could make Amazon difficult to manage its pricing strategy. The simple lower price strategy is not suitable for today’s changing economic environment and Amazon has to engage for a balance between lower prices and profits in consideration of marketing environment. 3. 2 Technological innovation strategies Figure 6 [pic] Source: www. atkearney. com From:http://www. atkearney. com/paper/-/asset_publisher/dVxv4Hz2h8bS/content/finding-what-every-ict-services-provider-craves-healthy-profits/1019 [pic] Source: William Blair; The Economist.

From: http://www. economist. com/node/21530980/print When Bezos was asked by the question “what is the main difference between conventional retail and his business”, the answer was ‘the most important thing in retail is location and in his business is technology’. Amazon believed technology could help to offer better customer experience, to improve efficiency, to ultimately lower operating costs and enables the company to offer lower prices to customers. And they did continually invest on the technology innovation. From 2007 to 2009, it spent a number of major technological achievements on Kindle and AWC development.

The figure 6 indirectly indicates the increasing spend in IT industry. For Internet companies, advanced technology is the core competitiveness. In the previous PESTLE analysis, Amazon’s strategic position on the technological factor determines that it can not fall behind those competitors like Google and Apple in the intensive competitive environment. “Falling behind means you have to be eliminated”, an old adage that said. Science and technology constitutes a primary productive force in 21 century, especially for those internet companies (Teece, David J, 2010).

The most disruptive technological innovations by Amazon could be the Amazon Web Service (AWC). One of the most important products in AWC is Amazon’s cloud. And a number of big technology companies including Google and IBM have already embraced the cloud computing revolution. However, Amazon is commonly regarded as being the most popular and more commercialized than any of its competitor’s offerings (Gary J. Stockport, 2009). In a recent research, Barb Darrow (2013) suggests that Amazon’s cloud is bigger, more profitable than we think. Figure 7 [pic] From:http://www. slashgear. om/apple-icloud-vs-google-music-beta-vs-amazon-cloud-drive-07157822/ Figure 7 shows the total cloud market share is estimated to be $820 billion in 2014 and this number will steady increase in future. Figure 8 indicates that the gross profit of AWS could be $14. 8 billion in 2012, which accounts for a large proportion in Amazon’s overall profits. AWC is not only a strategic weapon that gives Amazon competitive advantages but also creates real income for the group. Good performance of Amazon’s technological achievement ensures its suitability in its technological innovation strategy. Figure 8 pic] From:http://seekingalpha. com/article/964201-amazons-stock-price-is-benefiting-from-irrational-exuberance 3. 3 Diversification and Marketing development strategies Amazon engages to offer customers all goods and services to meet their demands. Reviewing Amazon’s history, it started from an online bookseller to a diversified international organization and has been the largest e-retailer on the Internet today. The development of this great company is accompanied by the diversification of its product line and the strategy of diversification has been a core driver of its future directions.

In this section, three types of diversification strategy of Amazon will be analyzed and evaluated in considering its strategic positions. There are millions of items sold in Amazon category ranging from books, electronics and so on. According to the PESTLE analysis and Five Forces Model, the complete retail goods line not only attracts millions of customers every year but also provides Amazon competitive advantages in a intensive rivalry. Research from Tommy D (2009) suggests that customer prefer to choose e-retailer that could provide more items since its convenience and reliability.

In addition, the increasing products of books and video reinforce Amazon’s leader position in the online bookstore market and build brand recognition and customers loyalty. With the increasing numbers of brands sales in Amazon retail, it is easier for Amazon’s access more brands and this could increases its bargaining power against supplier, which means lower cost and lower prices for customers. Despite from Amazon retail, the diversification strategies are implemented in Amazon’s other related industries, for example, the fulfillment warehousing and payment system. The fulfillment and warehousing help Amazon construct ts complete logistics and distribution channel. The development of Amazon’s warehousing locations makes it easier to access to the express industry, which is an opportunity to enter other industries (Yogeshn, 2010). The payment system of Amazon Marketplace and Amazon retail could be a powerful financial tool which provides not only sustainable cash but also other hidden benefits. It is suggested that Amazon should pay more attention on its payment system. Its main competitor in US market, e-bay, developed pay-pal as a important payment tool in American customers’ daily purchasing activities.

To achieve its diversification strategy, Amazon also did a lot of acquisitions and alliances. Over the 2007 to early 2009 period, strategically aligned acquisitions and alliances remained a key way for Ama

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Amazon Strategic Analysis
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