Management Case Study Amazon. Analysis and Decision Making

Contents

List offigures

1. Introduction

2. Part I: Advanced Strategic Management
2.1 Industry analysis ofAmazon.com
2.2 Amazon.com’s strategy
2.2.1 Roadmap of company’s strategic intent
2.2.2 Pros and Cons of strategic choices
2.2.3 Rational with concluding remarks
2.3 Full retail stores compared to pure online stores

3. Part II: Business Development
3.1 Amazon.com’s strategy during 2007 to early 2010
3.2 Amazon.com’s strategic capabilities
3.3 Evaluation ofAmazon.com’s diversification strategy
3.4 Future strategy ofAmazon.com

4. Part III: International Business Game
4.1 Network effects
4.2 Transfer prices
4.3 Individual interest rate for long-term debt

5. Bibliography

List of figures

Abbildung in dieser Leseprobe nicht enthalten

1. Introduction

As the number of publications referring to Amazon increased formidable during the last years, it is a highly discussed retail brand, which is becoming more and more important. In July 2016, the UK trade marketing association DMA¹ published a study showing Amazon as favorite retail brand amongst competitors like John Lewis, Marks & Spencer, eBay and ASOS. Everyfourth ofthe 1000 participants voted forAmazon, even though theywere not given a shortlist with answers, but an empty text-box to fill in their favorable retail brand (of. Forbes 2016).

This paper deals with aspects referring to the research fields Advanced Strategic Man­agement, Business Development and International Business Game. At the end of each part a summary with the most fundamental information helps to build a broad overview.

2. Part I: Advanced Strategic Management

Hereafter, the focus is on developing a solid and systematic industry analysis of Amazon by considering broader forces of competition in the form of Porter’s Five Forces analysis. Followed by pointing out Amazon’s strategy, elaborating a roadmap of the firm’s strategic intent, generating three pros and cons of their strategic choices and lastly establishing a rational with concluding remarks in terms of scenarios.

2.1 Industry analysis of Amazon.com

Porter’s Five Forces analysis is used to identify competitive rivalry amongst similar com­panies. Therefore, the focus lies on the Threat of New Entrants, Bargaining Power of Buyers, Threat of Substitute Products or Services, Bargaining Power of Suppliers and the Rivalry Among Existing Competitors in the micro-environment of a firm (cf. Porter 2008: 26 to 33).

By focusing on the threat of new entrants there is clear evidence that it might be impos­sible to replace Amazon in the environment of online retailers. On the one hand, it seems easier for companies to enter such markets because of the low entry barriers with the help of the internet. But it has to be taken into consideration that other obstacles like capital requirements in the form of initial investments, access to sales channels and state re­strictions respectively regulations have to be respected. On the other hand, Amazon is one of the biggest players in the world markets with many years of experience, endless resources, tremendous know-how and a high buyer loyalty, which is strengthened by global advertising, an inimitable product differentiation and customer binding advantages through offerings like Amazonprime².

When looking at the bargaining power of buyers it has to be taken into account that customers have almost endless opportunities to compare prices and services at the mar­kets through the use of the internet. As a result, Amazon is replaceable from one product to another and might lose market share. That is the reason why Amazon tried to create bonds to their customers via launching services like Amazonprime, which helps the clients to get their goods delivered faster and free of charge, and establishes a bond between the buyers and the company. Most of the other big players in the online retail segment lag behind Amazon, since their primarily focus is not driven by putting the customers in the middle of the whole business structure, bur exactly this is valued enormous by the con­sumers.

By putting emphasis on the threat of substitute products or services a differentiation between conventional, local shops and other online retail offerings matters. First, the tradi­tional stores give their clients a feeling of personal support and what is considered as to be even more important is the fact that the prospective buyers are able to touch and feel the product. By contrary, the exclusively online operating retailers might present an exten­sive product portfolio and the prices seem cheaper most of the time, since money for em­ployees in stores, rent and equipment are no longer necessary. All in all, the biggest threat in terms of substitute products or services arises, if conventional shops start to es­tablish online stores and manage to adapt their prices to the ones of online retailers like Amazon and others.

Since Amazon is always trying to centralize the focus on the customer through providing a wide range of products, to a low price, in an adequate delivery time, the strategic position towards their suppliers is often unfavorable. As a result, the bargaining position of those suppliers is definitely strong. By selling products or services, which are privileged to a certain number of manufacturers the negotiation might become complicated. But as nearly every supplier is smaller than Amazon itself, they benefit from offering their prod­ucts on such a big customer database company, because of the endless reach in terms of potential buyers. Additionally, the interests of profit go hand in hand with Amazon’s fanati­cal brand loyalty and reputation. Due to the fact that Amazon offers free return slips and delivery, evaluations of former clients who bought the product, and an A-to-Z guarantee³ for their sales, prospective customers usually prefer not to buy from a small and unknown online store.

Since nowadays the majority of businesses run online retail stores besides their conven­tional shops, reaching customers from all around the globe is becoming more frugal. Any­way, those small enterprises are not able to compete with the customer base, product diversification, pricing models, delivery aspects and many other fundamental services offered by the big players and demanded by the clients. As a result, the biggest competi­tive rivalry amongst the world’s largest retailers, like Amazon, eBay, Wal-Mart, CVS and the Chinese e-commerce giant Alibaba is in evidence. The most essential driver for com­petition is the low switching effort required by a customer to change a retail provider, as in most of the cases it is just necessary to sign up and deposit paying information in the form of credit/debit card, bank account or even voucher.

In the following diagram Porter’s Five Forces are ordered by decreasing strength of their impact on Amazon’s environment (cf. Figure 1).

Abbildung in dieser Leseprobe nicht enthalten

To sum up, in the competitive environment of online retailers it is fundamental to have the necessary capital requirements and to establish a high market share. Since Amazon is one of the biggest players in this sector over decades, it is not likely that new entrants might replace it. Anyway, offering a new, efficient product on the markets might lead Ama­zon to struggle whether producing it or just adding it to the product portfolio. In the end, it is all about the pricing of products and that will become even more important in the future. Last, there is to say that Porter’s Five Forces were used in this case, because they fit best to analyze broader forces of competition. As a recommendation Amazon may also elabo­rate a PESTLE analysis⁴, which considers aspects that might influence a business in its macro environment.

2.2 Amazon.com’s strategy

The first step to elaborate Amazon’s overall strategy is to choose between a number of different opinions. Lindsay Marder (2017) pointed out that Jeff Bezos’, CEO of Amazon, strategy to lead his company to the top of the world consists out of four pillars, which in­clude customer centricity, innovation, corporate agility and continuous optimization. Ac­cording to Jeff Bezos, the three pillars of his business are the retail market place, Ama- zonPrime and AmazonWebServices (cf. Figure 2), but with AmazonStudios and Ama- zonEcho the possibility to increase the number of columns to five is conceivable (cf. Novet 2016).

Abbildung in dieser Leseprobe nicht enthalten

In contrast, the “Amazon.com 2007 - early 2009” case study of Gary J. Stockport (2010: 575) examined a strategy to guide and reach the CEO’s vision by focusing on a three- pillar strategy consisting of the fundamental aspects selection, price and convenience with its foundation on innovation. Since this paper refers to the previously mentioned case study of Gary J. Stockport the elaboration of Amazon’s strategy will be on this basis.

2.2.1 Roadmap of company’s strategic intent

The first pillar Selection describes the diversified product portfolio, which in the first years until the end of 2007 solely included a vast selection of retail products, but developed over the years towards the widest selection of products including Amazon’s software and Cloud Computing services. Firstly, they decided to join the streaming markets with the launch of AmazonVideo in September 2006 and AmazonMusic in September 2007 to create a tight­er bond to their customers. Afterwards they began to offer self-produced, innovative prod­ucts like the Kindle e-paper reader, the first tablet KindleFire, the AmazonFireTV-Stick, and AmazonEcho. The management of Amazon focalized on a customer-centric view at all times and therefore there has been no struggle regarding high investments in data pro­tection, security and innovative power, which resulted in overcoming the high market entry barriers from the beginning onwards and had a significant impact on becoming a big play­er in the global online retail market.

Second pillar named Price was dedicated to Amazon’s thinking of price leadership. They started to offer the best prices promising to avoid any forfeiture in terms of quality. With providing free deliveries for buyers and guaranteeing on-time delivery they were the first business in this market sector, resulting in an enormous rise of market share. In February 2005 Amazon launched AmazonPrime shipping, which had the goal of a fast delivery of about one million products as an everyday experience. Later, they improved these ser­vices to receive the order the next day, the same day via AmazonSameDay or some products even within two hours through purchasing via AmazonPrimeNow.

Convenience is considered as the third pillar of Amazon’s strategy and affirms the cus­tomer-centric view of Amazon. There have been huge investments in R&D to understand the client’s desires and to convince those to buy products or services from their online store. Additionally, Amazon was one of the first enterprises, which started to track cus­tomers’ behavior to actively optimize their shopping experiences and improve customer satisfaction overall. Last one by offering customer reviews and feedback forms on every product provided.

2.2.2 Pros and Cons of strategic choices

At first glance Amazon’s strategic choices seem to be successful and fully developed, but some advantages and disadvantages might be found with the help of a profound insight.

The most fundamental benefit of Amazon is the current market positioning, which has been established over decades through a lot of long-term investments. On the one hand is unlikely to be overpowered by any new entrant as the barriers are high, and on the other hand this position provides a solid basis for protection against the loss of market share to direct competitors. Another pro, which also results out of former long-term investments is the ability to diversify the strategy rapidly due to a broad product and service portfolio. This broad product range also helps the business to distribute possible threats across several shoulders. Besides that, Amazon generated a massive advantage through collect­ing, saving and analyzing data of their buyers over a period of many years. By means of this customer knowledge the business is able to predict future changes in consumer be­havior premature and thus might have more time to develop a reaction strategy. To go even further, it might be possible to influence the clients’ view of the company through advertising before an adverse change seems to occur.

Nevertheless, Amazon needs to face disadvantages regarding its strategic choices. An essential one is the financing structure of the business persisting since the early years.

For one thing, customers are given short terms of payment, resulting in utilizing the buyers as a source of fund, whereas suppliers are endowed with long terms of payment (cf. Stockport 2010: 580). Therefore, Amazon is tied to keep those payment terms, as a change might threaten its entire liquidity. Moreover, it might be dangerous for a company to offer a wide range of products and services, since the dependence on suppliers in spe­cial cases is very high, and as a result the quality might suffer. An example might be, if one of the three pillars described by Jeff Bezos breaks down due to unpredictable circum­stances. By looking again at the aspect “price" of the three core pillars, another con might arise, since it may happen that the promised price leadership accompanied with no sacri­fice to quality, is not kept due to future changes in the environment. As a result of this cir­cumstance the customer-centric view of the enterprise will be violated and thus the clients are able to look for a new retailer by virtue of low switching costs.

2.2.3 Rational with concluding remarks

To sum up, it can be said that Amazon’s three pillar strategy might be extended by the aspect of long-term investments. A steady increase of capital spending in technological innovation has been essential over decades and will also be fundamental for future suc­cess. As mentioned before in the period between February 2005 and September 2007 such long-term investments lead to innovative products and services launched by Ama­zon, which are nowadays considered as the three core pillars by Jeff Bezos. By spending more and more money for technological improvement and simultaneously fulfilling cus­tomers’ desires, the company will continue to spread its business activities all around the globe. Another essential issue is the willingness to diversify the product respectively ser­vice portfolio again and again.

2.3 Full retail stores compared to pure online stores

An article published in the Denver Post (2017) reported about a half-dozen physical retail stores opened in 2015 by Amazon, which are called “campus bookstores”. Those shops do not work like conventional ones, since the clients have to purchase books and furnish­ing in the online stores with their account and later on pick up the purchased items in a bookstore. Therefore, shipping costs are lower or in some cases even free.

Amazon is dominating the e-commerce sector, but according to eMarketer⁵ still 90 percent of the global retail is spent in conventional stores. A big opportunity for Jeff Bezos’ busi­ness might be to combine retailing with automation and data mining from e-commerce, like Brian T. Olsavsky, CFO of Amazon, told the investors “another way to reach the cus­tomers and test what resonates with them” (Perry 2017).

In general, there are many ways how physical stores might help the development of Ama­zon, but five of them seem most reasonable (cf. Denver Post 2017).

[...]

¹ DMA: trade organization specialized to promote direct marketing

² Members receive benefits which include FREE fast shipping for eligible purchases, streaming of movies, TV shows and music, exclusive shopping deals and selection, unlimited reading, and more (cf. Amazon 2018).

³ Amazon guarantees purchases from third-party sellers through A-to-z guarantee. The condition of the item you buy and its timely delivery are guaranteed and expenses are refunded, when violation of conditions (cf. Amazon 2018a)

⁴ PESTLE is an acronym for Political, Ecological, Social, Technological, Legal and Economic factors that might influence a business in its macro environment.

⁵ eMarketer: provides insights and trends related to digital marketing, media and commerce (cf. eMarketer 2018)