Amazon – Strategic Capability

Amazon – Strategic Capability

Executive Summary

This report has been designed to identify Amazon’s strategy between 2007-2010 and also to pinpoint the company’s strategic capabilities. Internal and External analysis reveals Amazon’s position against its competitors as well as sources of value creation and cost reduction in its value chain. Amazon. com is a leading e-retailer and is a globally recognized brand, but is facing increasing competition from bricks and mortar companies setting up an online presence and current e-retailers increasing their geographical and product scope. Amazon. om also faces strong rivalry in its Web Services Business where more specialized web services companies are able to offer more products and have a broader geographical presence. The report finds that Amazon’s weakness as an e-retailer arises from the cost of delivery and its reliance on outsourced firms to fulfill its product delivery. To improve the customer experience that Amazon is focused on, this report suggests that Amazon enters into a joint venture with delivery companies to have better control over delivery costs and delivery service levels.

Amazon. com founded by Jeff Bezos in 1995, is the top E-commerce store worldwide in terms of revenue. Amazon. com has a market capitalization of US$29. 4 billion, an operating income of $1. 406 billion and employs 33,700 employees across the globe. It started out as an online bookstore but has expanded and diversified its services and products to cater to a diverse customer base ranging from retail customers to business customers through two strategic business units, its retail strategic business unit and its software business unit. Amazon. om has established itself as a global company and has websites catering to foreign customers in Canada, United Kingdom, Germany, France, Japan and China. Foreign sales contribute 47 per cent of the company’s consolidated sales. Amazon’s early growth came from its ability to redefine the way bookstores sell its books to retailers. Amazon’s foray into the online bookstore business then could be considered a form of blue ocean strategy, by creating a new market space with no significant rivalry and where demand is created and not fought over.

It look Amazon. com less than a year to be recognized as the web’s largest and best online book store with over a million titles. A private investment of $1. 2 million along with Silicon Valley funding and a $50 million dollar initial public offering of Amazon’s shares allowed the company to aggressively expand during the period. However, since share listing in 1997, Amazon has yet to pay dividends to shareholders and investors rely upon share price fluctuations for investor returns.

By this period of time, what was once a blue ocean market has turned into a red ocean, the online retail market space is now crowded with competition and prospect for profit and growth are reduced. The apparent lack of payoff in Amazon’s earlier investment for investors coupled with Amazon’s plan to spend heavily on its new Web Services Technology during this period resulted in its stock price plummeting close to 50 per cent from 2004 to 2006. In 2007, Amazon was forced to invest in its technology and market expansion at a slower rate in order to subdue shareholder anxiety.

Despite being forced to slow down its investment in technology and market expansion, Amazon’s strategy employed allowed it to remain competitive during this period through early 2010. Fig 1. 1 http://ebaystrategies. blogs. com/ebay_strategies/2009/02/episode-iiib-amazon-and-the-cef. html A strategy is a plan of action that involves resource allocation and activities for dealing with the environment and ultimately achieving a competitive advantage. The strategy also seeks to exploit core competence, build synergy and deliver value for the company. Amazon’s plan of action revolves around Fig 1. 1 known internally as Bezos napkin diagram.

It shows that growth has always been central to Amazon’s strategy and that the company believes that it is able to achieve growth through being “customer centric” and continually improving the customer experience by adopting the three pillar strategy. These pillars are selection, price and convenience and Amazon believes that by fulfilling these three demands of customers they will be able to improve customer experience, traffic to Amazon’s websites by both customers and sellers will increase and this in turn is fed back to growing resources for innovation for improved customer experience and this cycle forms Amazon’s strategy.

Using Porter’s Generic Strategies to study Amazon’s Strategy, we can determine that Amazon strategy is largely built on cost leadership although it appears that elements of the differentiation strategy are adopted as well. Therefore using the strategy clock concept, Amazon’s generic strategy can be deemed as a Hybrid Strategy that seeks to simultaneously achieve differentiation and low price relative to competitors.

Hybrid strategies enable companies to aggressively win market share and build volume sales although Porter argues that its best to choose a generic strategy to adopt and stick to it rigorously and hybrid strategies leads to a danger of being “stuck in the middle”. However the hybrid strategy appears to be working well for Amazon. Cost leadership is a strategy Amazon primarily adopts as the company targets a broad market and offer similar quality products at a lower price than many of their competitors in order to gain a higher market share.

Amazon is able to employ the cost leadership strategy mainly due to its size and dominance in the market. As the top E-commerce store in terms of revenue, Amazon has the bargaining power with manufacturers to acquire products are lower cost than most of its rivals thus enabling the company to be a cost leader. Amazon is also able to implement this strategy much more effectively through its investments in technology. Amazon’s stores are built upon its own proprietary back end system while most rivals depend on third party providers for their back end solutions.

This lowers Amazon’s operational costs and improves its process efficiency. By having an internally integrated back end solution, Amazon is able to better manage its storage and handling costs, cutting lead time. Amazon is also able to differentiate itself from its rivals through its customer centric focus and strive to achieve convenience for its customers. The differentiation strategy is aimed at offering benefits that are appreciated by the target market where the company are the leaders in service offering, quality or technology (Vranesevic et al, 2006) .

The Company is able to achieve differentiation from its rivals by offering services such as its “1 click” checkout system, recommendation and suggested items personalized to each individual customer. Due to Amazon’s investments in technology, Amazon was also able employ non-competitive strategies. Amazon’s development of the Amazon Kindle electronic reading device is part of this non-competitive strategy that Amazon adopts. The Amazon Kindle unveiled in 2007 enabled customers to download reading materials available on Amazon’s Kindle Store through Amazon’s Whispernet.

The Amazon Kindle enabled Amazon to achieve strategic lock-in where users become dependent on Amazon for their reading materials and are unable to use another supplier without substantial switching costs. Amazon achieves this by controlling complementary products of the Amazon Kindle, in this case the Kindle store and the Amazon Whispernet. Strategic capability can be defined as the adequacy and suitability of the resources and competences of an organization for it to survive and prosper. Johnson et al, 2005) Porter (1980) argues that it’s the industry structure within which the organization competes and how they position themselves that determine how profitable the firm will be and his models revolve around this argument. The resource base view of strategy however points not to industry structure but to the unique clusters of resource and capabilities each company possesses (Collis and Montgomery 1995, Stalk et al 1992) and therefore is much better suited in analyzing Amazon’s strategic capabilities.

The Resource Based View assumes that firms can be conceptualized as bundles of resources and those resources are heterogeneously distributed across firms and that resource differences persist over time (Amit and Schoemaker, 1993) and when firms have resources that are valuable, rare, inimitable and non- substitutable (VRIN) they can achieve competitive advantage that cannot be easily duplicated by other firms.

The Resource Based View defines resources as the assets that organizations have or can call upon and competence as ways those assets are used or deployed effectively. Amazon’s strategic capabilities can be grouped into three main types of resources, namely physical, financial and technological. Significant physical resources Amazon has are its warehouses, fulfillment centers, software development centers and its product offerings.

These physical resources are further enhanced by Amazon’s competences. Amazon’s knowledge on setting up efficient delivery systems resulted in strategic positioning of its warehouses and fulfillment centers aimed to minimize delivery time and ultimately improve its customer experience. Amazon’s software development centers do not just create products catered to Amazon’s customers. The company’s ability to integrate technologies developed by its Software development unit to its retail unit provides the company with a competitive edge.

Amazon’s diverse product range from software to books is further enhanced by Amazon’s ability to leverage on its size to achieve cost leadership when pricing these products in the market. Amazon also shows that its competence lies not solely in cost leadership but also in its ability to create strategic lock-ins for its products. The use of strategic lock in is apparent in both its software and retail strategic business units. Amazon has achieved this in its software business unit by offering an integrated software solution to its customers.

An integrated software solution could be seen as a way to meet the demands of customers for better data management and efficiency however from a strategic standpoint, this integration creates a strategic lock-in for customers as their day-to-day operations are reliant on more than one of Amazon’s software resulting in a higher switching cost should they decide to change. Amazon’s Kindle book reader sold through its retail SBU also capitalizes on Amazon’s competence in creating strategic lock-ins. Amazon has made its whispernet the only way to download contents to its Kindle book readers.

Amazon offers its Kindle book readers at low prices that attracts customers and locks them into the product ecosystem once they purchase the Kindle. This strategic lock in also allows Amazon to profit from repetitive transactions as customers purchase content for their Kindles. Both examples cited above also iterates Amazon’s competence in managing a diverse product portfolio yet keeping its products integrated. Amazon’s strategic capabilities also lies in its financial resources and its competence in the managing it.

Amazon is able to boasts strong cash flows while reducing reliance on borrowed funds for day-to-day operations by offering short credit terms to its customers while enjoying longer payment terms from suppliers, difference being approximately 26 days. This creates an operational advantage for Amazon as it’s able to use funds collected from customers as a source of working capital. This also allows the company to fund its technological innovation with less reliance on long term debt. Technological resources and competence also form part of Amazon’s strategic capabilities.

Amazon’s whispernet and cloud computing technologies are enhanced by Amazon’s ability to create an efficient online content delivery system for its customers and the ability to leverage on its size to provide cloud computing at low cost to its customers. Individual analysis of Amazon’s strategic capabilities suggests that they are generally threshold capabilities; capabilities that are needed for organizations to meet the necessary requirements to compete in a given market and achieve parity with competitors in the market.

The success of Amazon however lies in three distinctive capabilities, its ability to integrate software technology with its retail strategic business unit, its ability to achieve cost leadership and its ability to create strategic lock-in. These three distinctive capabilities met the four key criteria for achieving sustainable competitive advantage (VRIN). All three capabilities provide value to customers and take advantage of opportunities unique to Amazon due to its size and position as both a business to consumer and business to business retail and service provider.

These three distinct capabilities are also rare due to Amazon being a software and retail provider, few other companies are capable of competing with Amazon on both fronts. Due to the complexity of internal linkages Amazon’s strategic capabilities tap upon they are also inimitable by its rivals. Lastly, Amazon’s capabilities also do not appear to be substitutable. Market development and new products and services are two forms of corporate trategy directions that Amazon took when it saw its retail strategic business unit’s profit margins and growth shrink as new entrants entered into the online retail business. Amazon saw diversification as a way to introduce new products and services to its existing markets and also to develop new markets based on existing products and services. Diversification benefits companies as it can improve debt capacity, reduce the chances of bankruptcy by going into new product and markets (Higgins and Schall 1975, Lewellen 1971), and improve asset deployment and profitability (Teece 1982, Williamson1975).

Skills developed in one business transferred to other businesses, can increase labor and capital productivity. A diversified firm can transfer funds from a cash surplus unit to a cash deficit unit without taxes or transaction costs (Bhide 1993). Diversified firms pool unsystematic risk and reduce the variability of operating cash flow and enjoy comparative advantage in hiring because key employees may have a greater sense of job security (Bhide 1993).

Diversification involves increasing the range of products or markets served by an organization and can be further classified as related diversification where products and services have relationships with existing business or conglomerate diversification where products and services diversified have no relationships with existing businesses. Amazon appears to prefer the route of related diversification, diversifying into products and services that have relationships to its existing businesses.

Related Diversification allows the corporate center to exploit the interrelationships that exist among its different businesses (SBUs) and so achieve cost and differentiation competitive advantage over its rivals (Marikides. C 1994) and this is apparent in Amazon’s diversification strategy. Fig 3 http://www. gems-europe. com/get_file/display_gems_document/165 Amazon has made three significant diversifications in its operations since it started in 1995. The first significant diversification in Amazon took place in the strategic business unit level where it diversified its product line from books to other consumer products.

This diversification is driven by exploiting economies of scope and exploiting superior internal process that Amazon has and is aimed at increasing its market power. Some argue that by looking at Fig 3, Amazon is pursuing conglomerate diversification as the products being offered by Amazon have no relationships to existing businesses. However, upon closer study of Amazon’s product line expansion, one could conclude that the underlying mode of diversification is related in nature. Conglomerate diversification requires companies to offer new products and new services in new markets.

Although Amazon offers new products and services, it is still competing in the existing market of online retailing, products and services offered by the company also have a relationship to existing business as they retail on the same platform. Amazon is able to tap on existing resources such as its web platform, technologies, warehousing and order fulfillment process and apply them on new products it offered. This could also be seen as a form of horizontal integration for Amazon.

The second significant diversification happened while Amazon continued to expand its product offering to consumers and is driven by exploiting economies of scope and also as a respond to market decline in its retail business. While retail sales and growth decline, the company continued to invest and develop in web technologies meant to provide consumers with a “customer centric” experience. This backward integration gave the company the opportunity to develop a new market by offering its web technologies to other businesses.

Amazon has been developing the technology for its own use and thus is able to use existing resources when it decided to offer the technology to other online businesses. This related diversification also gave Amazon a competitive edge as Amazon now provides web services to other online retailers who were regarded as Amazon’s rivals. The third significant diversification for Amazon came when they decided to pursue the concept of the Kindle e-book reader, the production of the Kindle marked Amazon’s first foray into the hardware aspect of technology and further diversifies Amazon’s product line.

The kindle being the first Amazon branded physical product also forward integrates the company allowing the company to be both a content and hardware provider. This can still be considered a related diversification as the Kindle is dependent on Amazon’s online store for content. Amazon’s use of related diversification is largely successful as it complements the company’s strategic directions and creates synergy between Amazon’s strategic business units and improves their performance as strategic business units gain benefits from other strategic business units and the assets and activities of each unit complement each other.

Related diversification has also granted Amazon a competitive edge as the company vertically integrates through its diversification into web services and hardware. Amazon entering into these activities where the organization is now its own supplier and customer allows Amazon to have better control of its value chain and allowing the company to better customize its customer experience. A new strategy is required for Amazon going forward and SAFe criteria will be used to evaluate the strategy.

A SWOT analysis will be carried out to understand Amazon’s position and to formulate a strategy. The SWOT analysis will also be necessary as the SAFe criteria are reliant on strengths, weaknesses, opportunities and threats of a company. SWOT Analysis Strengths Amazon’s strength lies in its position being the largest online retailer in the United States with three times the internet revenue of runner up Staples Inc. Amazon is also a highly diversified company selling a wide range of consumer products as well as web services that cater to businesses.

The company also has a strong geographic presence with offices, customer service centers, software development centers and fulfillment centers in Asia, Europe, Latin America and America. The company is also highly focused on building innovative technology and is vertically integrated with its retail strategic business unit built on and supported by technologies from its web services strategic business unit. Weaknesses Amazon’s weaknesses come from its negative retained earnings, its share price has also dropped 11% as a result of its earnings dipped 73% in the 3rd Quarter of 2011.

The firm is also highly dependent on outsourced delivery firms for its product delivery. It is also highly dependent on Amazon associates which contribute up to 40% of its retail revenue. Amazon’s retail strategic business unit is also heavily reliant on suppliers and the United States market. Opportunities Amazon has the opportunity to better manage its delivery time and cost by going into joint ventures to improve its delivery time. Increased internet usage worldwide also gives Amazon an opportunity to look into various form of internet retail for its products.

Threats Transportation costs is increasingly a threat to Amazon as it affects both the cost of its products and the cost it incurs when it provides free shipping to customers. Customers would also be drawn back to physical retailers should delivery costs increase. Amazon also has lack of control over delivery as it outsources them to third parties. Amazon web services also face the threat from more specialized web companies that are able to dedicate more resources to providing web service solutions.

Amazon claims that it is “customer centric” but yet it outsources a crucial part of the customer experience to third party firms. The lack of control over delivery and raising transportation costs appear to be a challenge that threatens profits and growth for Amazon in the long run and therefore this report proposes that Amazon should consider going into joint ventures with delivery firms to have better control over delivery times and costs. Alternatively, Amazon should also consider entering into partnerships with other web service providers.

Web service providers are able to leverage on Amazon’s expertise in online retail technology while Amazon is able to benefit from dedicated resources available from these other providers. The SAFe Criteria evaluates the strategy on three areas, suitability, acceptability and feasibility. Suitability is concerned with assessing which proposed strategies address key opportunities and constraints an organization faces through an understanding of the strategic position of an organization. It is concerned with the overall rationale of the strategy.

The strategy of entering into joint ventures with delivery companies exploits opportunities mentioned in the SWOT analysis. Amazon is able to better delivery time and cost and this in turn puts Amazon in a better position when it rolls out other internet retail platforms. By entering into joint ventures, Amazon also capitalizes on its strength of being the largest online retailer. Amazon is able to provide a strong stream of delivery orders to the joint venture through its online retail front. This also remedies Amazon’s weakness of being highly dependent on outsourced delivery firms for its product delivery.

The alternative strategy of partnership with other web services address the key opportunity of increased internet usage, a partnership can capitalize on this growth and provide their services to the growing amount of web retailers, it also capitalizes on Amazon’s strength in online retail technologies and addresses it’s weakness of being too reliant on its strategic business unit. Acceptability is concerned with whether the expected performance outcomes of a proposed strategy meet the expectation of stakeholders, the three key aspects of acceptability are risk, return and reactions of stakeholders.

The risk involved with entering into a joint venture for delivery would be the volatility of transportation costs. The risk involved in entering into a joint venture lies with the cost of the operation, there’s a risk that poor cost management between Amazon and its partner could result in higher delivery costs than if Amazon continued with outsourcing. The expected returns from this strategy would come from Amazon’s ability to retain profits within the company through the joint venture that would otherwise flow out to third party delivery firms and also from the expected lower cost of product fulfillment.

Stakeholders can also expect returns in terms of better customer experience and further enhancement of Amazon’s “customer centric” goal. Stakeholder’s reactions to this strategy should be positive as joint ventures would be cheaper than if Amazon decided to diversify into delivery alone and the strategy will improve Amazon’s strategic position in the long term. Acceptability of the alternative strategy of partnership with other web services providers will however prove difficult. There is an intellectual property risk in such a partnership as it would require Amazon to share its online retail technologies to its partners.

Amazon could risk having their technologies stolen or replicated during this process. The returns on this partnership would come from the web services and technology the partnership is able to sell to online retailers. This however posses the problem as the new partnership would cannibalize on Amazon existing market share. Stakeholder reactions to this partnership would not be positive due to the two points mentioned above. Feasibility is concerned with whether a strategy could work in place and whether an organization has the capabilities to deliver the strategy.

Amazon is definitely capable of implementing the strategy effectively as it has the resources and competences to do so. Amazon already owns fulfillment centers globally and is competent in its own internal delivery chain. The strategy of entering into joint ventures for delivery will complement Amazon’s existing competency and resources. Amazon has the resources and competence to implement the strategy of partnership with other web service provider however the strategy is largely unfeasible due to the risk and market share cannibalization it might incur in the process.

The value chain analysis was undertaken to examine distinctive value chain activities and operation effectiveness of activities that allowed Amazon to perform better than its rivals Using the framework proposed by Amit and Zott (2001) this analysis focuses on value creation and transaction cost economies; where Amazon shapes its value chain activities to create unique value for customers, reduce its costs of carrying out its operations and reduce the cost of its customers’ transactions. The diagram on the next page will indicate examples of how Amazon has created value and reduced costs in its value chain activities.

Support Activities | Margin Firm Infrastructure| | Value Creation| Cost Reduction| | Vast centralized customer data warehouse is made available to all Amazon business unitsCentralized planning function in corporate headquarters oversees seven different functions | Single technology platform with services being incrementally distributed to other locations globally therefore reducing cost by leveraging in investments | | Human Resource Management| | Value Creation| Cost Reduction| | Employees are offered unique benefits including stock grants and relocation allowances.

This allows Amazon to locate warehouses in economically cheaper areas yet attract highly skilled workers. | Amazon sources expertise from highly experienced workersfrom other competitors such as Walmart | | Technology Development| | Value Creation| Cost Reduction| | High investments in technology development to leverage new but unknown opportunities. Using standard hardware systems from HP to reduce cost ofmaintenance and compatibility (Neel, 2000)| Amazon built its IT strategy, IT infrastructure and Data centre on Linux open source software thus reducing cost of technology development.

Amazon also renting computing resources to other companies reduce total cost of ownership (Business Wire, 2007)| | Procurement| | Value Creation| Cost Reduction| | Amazon used BookSurge, one of its Strategic Business Unit to keep a large inventory of digital copies of books and making them readily available for customers through print on demand-on-demand. This reduces time of delivery for the company. (The Economist, August 2006). Distribution centers, warehouses and fulfillment centers are build strategically to increase speed of order processing and also avoid transaction costs of contracting out its logistical needs (Laseter et al, 2000). | Primary Activities| Inbound Logistics| Operations| Outbound Logistics| Marketing & Sales| Service| | Available accurate forescasting technology allow returns to supplier to be reduced significantly (Laseter et al, 2000)| Simple and speedy payment systemsOnline customer Support| Close proximity to motorways to allow faster delivery times and lower transport costs| Discount and price reduction made available to custoemrs.

Similar products are recommended tocustomers interactively. | arketplace increases channel and rangeof goods through third party sellersand customers. | | Efficient gathering of Customer Experience allows improved service inputs and inventory controls | Around the clock warehouse operations to manage customer demands| Ability to consolidate orders bound for specific locations | Interactive interface for shipping,parcelling and pricing calculations Free delivery based on amount spend in a singletransaction| Price comparison of newproducts with used productssold on Amazon marketplace |

Given Amazon’s wide range of products, there are many online retailers and service providers that Amazon competes with. Competitors too are increasing their product range into new markets and expanding their market penetration into exisiting markets due to economies of scale. A strategic group analysis would help us map Amazon’s position in the market against the rest of its competitors. The strategic group analysis will place emphasis on product line breadth and geographical scope.

Barnes & Nobles is seen as a direct competitor against Amazon in books and lifestyle goods however Amazon has a wider portfolio. Wal-Mart is similarily priced when compared against Amazon but offers a wider range of products includcing phamaseuticals and photo printing service. From this perspective, Ebay remains a top player with 29 geographic locations and 22 product categories where as Amazon only has 7 geographical locations and 11 product categories.

Amazon’s position suggests the need to urgenly expand its product line breadth and market presence in its competition with market leader Ebay. It should however be noted that some key competitors like Wal-mart, HMV and Branes ; Noble pose more competitive threats since they have physical stores. Amazon. com has to adapt its strategies to address these competitive threats. E-retailing: Strategic Group Analysis Geographical Scope Ebay. com Walmart Online Amazon. com Yahoo. com Overstock. com HMV Online Group Barnes ; Noble Online

Product Line Breadth The other area which a strategic group analysis was carried out was focused on Amazon’s web services business unit. Google is the leader in this strategic group with 90 products and operates in 23 geographical locations. Competitors of Amazon generally have a larger geographical scope than Amazon and there is a need for Amazon to increase its geographical presence to compete with other web services providers. Web Services: Strategic Group Analysis Geographical Scope Microsoft Product Line Breadth Google Amazon. com Yahoo. com Apple

A GE Matrix was also used to identify the attractiveness and overall competitive position of the markets that Amazon has operations in, using indicators Johnson et al (2006) identified. The Matrix showed that although all markets appear to face similar conditions, China and the United States appear to be the most attractive for Amazon as they are large and dynamic markets. Amazon however has the weakest position within Canada and China suggesting it need for more investments into those markets. Amazon has considerable positions within the industry in other markets in the matrix.

The above analysis showed that Amazon has significant presence in the markets but there is an urgent need for Amazon to improve its geographical presence and product line breadth it still trails market leaders in both strategic groups in both areas.


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