Part A: Advance
established in July 1995 by Jeff Bezos as an online book store. First of its
kind, Amazon gained first mover advantage
and grew tremendously into global online
retailing giant that houses day-to-day products as well as offers web
development and cloud computing. Amazon’s tremendous growth is because it
believed in being customer-centric to the core and has invested in technology
to bring in innovation to facilitate the customers. By, 2008 Amazon.com had the
market cap of USD $29.5 billion with 20,700 employees.
Industry Analysis of Amazon
To understand the competitive environment
in which Amazon operates, an industry analysis can be done via the Porter’s five forces model.
Porter’s Five Forces Model
Using the Micheal E. Porter’s five forces
model we can analyze the intensity of competition and the forces that affect
the competition in the industry in which Amazon operates. In the Amazon
scenario, the external factors define the conditions of the e-commerce industry
environment, with focus on the online retail market.
Competitive Rivalry (Strong
Amazon competes against strong online and
traditional retailers. Although Amazon has strong footstep in the digital
retailing, but with growing number of retailers, both in the traditional and
digital medium, the competition is fierce. Wal-mart, Costco, and Barnes &
Noble are the significant substitutes in traditional retailing while e-bay has
given Amazon a tough time on e-retailing. Moreover, Since Amazon has expanded
into providing web development services to the consumers besides retailing
day-to-day goods, so the web development companies and software houses are also
In the web infrastructure industry, the two
giants Apple and Google are the Amazon’s biggest competitors earning revenue
higher than Amazon’s, according to exhibit 6.
The retailing industry has aggressive
competition because the growth and expansion in the business is higher.
Wal-mart has growing traditional retail setup as well as a growing website to
cater customers who like to shop online, hence the highest revenues among the
competitors as mentioned in Exhibit 6. As Wal-mart becomes more and more
available the threat of substitution to Amazon also increases.
Also, the switching cost from one retailer
to another for the customers is very low, perhaps negligible especially on the
digital medium. This gives customers more freedom to switch which causes the
competition to get even more aggressive as retailers tend to get each other’s
customers while retaining their own.
Bargaining Power of Amazon’s customers
Although Amazon strictly follows a
customer-centric approach and tries to satisfy customer needs but so does other
traditional and e-retailers as the competition is getting aggressive. Retaining
customers has become an important issue for today’s businesses because of
availability of options that has led most of the business to follow a highly
customer-centric approach. With a lot of focus on customers’ needs and
satisfaction, the bargaining power of customers has grown higher generally. The
case of Amazon’s customers is also the same and they have a high bargaining
power too because of availability of lot of options both on digital and traditional
medium offering them variety as well as lower price points. Moreover, as
mentioned earlier, the switching cost from one retailer to another especially
on the digital medium is negligible. This further empowers the customers as
they have nothing to lose when switching from one retailer to other while for
retailers it is a threat.
Lastly, customers have access to high
quality information and they can make informed decision while choosing a
retailer. The information not only includes products and prices of each
retailer but also includes reviews of other buyers regarding the shopping
experience from a retailer whether traditional or e-retailer.
Bargaining power of Amazon’s
suppliers (Moderate Force)
The availability of material and products
on the Amazon website depends upon the suppliers to a large extent. The limited
number of suppliers empowers them, however for each product several options of
suppliers are always available and since the switching cost is low, so Amazon
has liberty to switch from one to another supplier. Moreover, the chances of
forward integration are generally low which limits the affect of suppliers on
the Amazon. Furthermore, due to strong supply chain system Amazon is able to
get suppliers on its own terms. The suppliers must follow the code of conduct
set by Amazon which includes prohibition of child labor, health and safety and
fair and ethical treatment.
All the above-mentioned factors result in
low to moderate bargaining power of suppliers of Amazon.
Threat of new entrants (Low
The barriers to entry for the new
businesses in the digital medium are very low and it is easier to establish an
e-retailer. The growth of digital technology has lowered the barriers to entry
and has made it easier to open new retail sites as a result many new
e-retailers have been established. E-bay, Alibaba, Flipkart and several other
businesses have emerged and are competing with Amazon.
However, to develop a brand as big as
Amazon is very hard. Firstly, it is very expensive to develop a brand giant
enough to compete with the leader, like Amazon. It will require billions of
dollars in marketing and brand development to create similar positioning. Also,
besides being expensive it requires a larger time to establish big brand.
Amazon enjoys the first mover advantage in the scenario.
Secondly, Amazon enjoys high economies of
scale that makes its business cost-effective and lucrative. To compete with
such a business the new entrant will require the same high level of economies
of scale which is very hard. Therefore, Amazon has a very low threat from new
Threat of substitutes (High
The substitute to Amazon would be the
traditional retailers which have physical presence like, Wal-mart and Costco.
The increasing number of new entrants in the retailing business and expansion
of existing retailers, like Wal-mart have increased the substitution force on
Amazon. Moreover, the switching cost for customers to switch from Amazon to
these traditional retailers is very low. All they have to do is to reach out to
the retailer and get the stuff instead of ordering online. Furthermore, these
retailers are offering competitive price and quality product which act as
incentive to the customers.
The high availability and low cost of
substitute traditional retailers have increase the force of substitution on
2. What is Amazon’s
strategy? Based on your analyses, give a roadmap of the firm’s strategic
Give at least three
pros and cons of their strategic choices and establish a rational with your
remarks in terms of
The central part of
Amazon’s business strategy is “Growth”. In 1995, Amazon started as an online
book store that soon become the largest and perhaps only online book store. It
happened because Jeff always had the idea of “growth “in mind. He chose digital
medium after performing a careful growth analysis of this medium and found that
it has a lot of growth potential. Therefore, since the beginning of this
venture the idea of growth was inhibited in the soul of the business. It is
because of the growth strategy that Amazon grew from online book store to e-retailer
that houses all day-to-day products and web services. The product portfolio
expanded from books to digital music, shoes, handbag, kitchen appliances, web
development services and many more.
Even the core
product, books, grew from traditional books to digital books through innovation
and technology. The Amazon product “Kindle” was a wireless device that enabled
the customers to download and enjoy the digital copies of their favorite book.
growth through their “customer-centric” approach. Jeff always had the idea of
being customer-centric and he wanted Amazon to be the most customer-centric
business in the world because he knew the power of customers. Therefore, the
vision of Amazon was to become the most customer-centric company.
Amazon developed a
three-pillar strategy to reach the company’s vision, i.e. to be customer
centric to the most in order to grow.
The three pillars
Amazon offers a very wide product portfolio. The portfolio includes
everything that customer can want or perhaps needs. From day-to-day products to
software and cloud computing. Also, the number of brands for each product is
vast that leaves customers with a lot of choices. The idea behind wide
selection is to house as much as customer needs so he/she won’t switch to other
retailers and Amazon becomes go-to place for people who are looking for
Amazon’s goal is to become price leader in the retail industry. The
idea is to become the center provides best quality at unmatchable and
reasonable price. Many of Amazon’s sites proves free and over-night shipping to
increase convenience and decrease price for the customers, for example
Endless.com that focuses on shoes and handbags and offer free and overnight
shipping with 110 percent price guarantee.
Amazon is highly committed to improve the shopping experience of the
customers on its sites. It indulges in pleasing the customers by offering what
they want at the most affordable price and best after-sale services. Amazon has
invested in understanding the needs of customers by reviewing customers’
feedback on its products.
Pros and cons of
The above mentioned
strategic choices have let business experience some pros and cons which are
High customer traffic:
Amazon offers a wide selection of products that increases the
choices customers have. Also, the products are available at prices that are
easy on pockets with free and swift shipping. As a result, Amazon experiences
high traffic on its sites and hence can generate revenue through
advertisements. So, the customer-centric approach is bringing customers to the
The customer centric approach of Amazon has let it invest in
technology to come up with innovative and unique products to facilitate the
customers. For example, Kindle. The strategic choices that the business has
made, have let it see the future and Amazon has thus invested in future through
The strategic choices that Amazon has made have provided it with
competitive advantage and thus differentiated it from the competitors.
Low customer loyalty:
The low pricing strategy generally attracts customers that are just
looking for low price and thus can shift easily to any brand that offers them
low price. Therefore, the strategy of low pricing has yielded Amazon non-loyal
customers and retaining such customers is always hard.
Although wide selection generally benefits customers and can bring
more customers as the business tend to cater the needs of many customers than
the needs of few customers through wide options. However, it can also result in
confusing a customer and a confused customer might not end up buying anything.
So, the wide selection does increase the traffic but the conversion rate of
visitors into shopper tend to decrease.
The low pricing strategy has made Wal-mart a direct substitute and
competitor of Amazon. Wal-mart has the largest revenue of 406 Billion dollars
in 2008 among the industry players. The physical outlets of Wal-mart are
growing extensively as well as their website is also getting popular among the
customers who like to shop online. Therefore, Amazon is facing serious threat
from Wal-mart because the growth strategy of both is same and with increasing
digital presence of Wal-mart the competition will get aggressive.
Jeff’s vision of
making Amazon a customer-centric company to the core is very far-sighted.
Digital technology has empowered customers a lot and also has provided them
with a lot of choices without any geographical restrictions. With the rise in power
of the customers and their options, businesses can only exist if they please
their customers and align their offering according to customers demand. Just
like Amazon did. For example, launching of Kindle was a very appropriate and
timely move considering that people are now shifting to digital copies of books
from the traditional ones. Amazon estimated the shift in demand and in customer
behavior and acted accordingly.
Amazon’s retail outlet
Amazon is opening retail outlet with
cutting edge technology that will enable them to charge customers automatically
and there will be no cashier in the outlet so that customers won’t have to wait
in the long ques just like they don’t on the digital stores.
The reasons why Amazon is taking this is
Visibility of products
To let customers,
experience the products by touching them before buying. Majorly, the outlets
are all about showcasing the gadgets that customers are more interested in
Customers who visit
outlets for the sake of window shopping, often ends up buying some product out
of impulse buying behavior. The same thing does not happen on digital medium as
people generally visit online stores only when they have something specific in
mind. The presence of products in front of customers push them to buy.
Therefore, to cash on that, Amazon is establishing physical outlets.
Save free delivery expense
Most of the Amazon
sites offer free delivery to the customers which cause expense to the business.
Cutting this service off can cause harm on the reputation and price leadership.
With the physical outlet, Amazon will not be required to deliver as customers
would be visiting and picking up the stuff themselves which will save the free
Amazon has already
inducted technology in their online store by creating innovative products like
Kindle and by analyzing the shopping behavior of people visiting the sites
through their digital footprints. Now they are inducing technology to the
traditional retail setup by offering automatic charge and cashier free outlet.
With retail outlet,
Amazon can improve customer loyalty.
In this part we have analyzed the
competitive scenario in which Amazon is operating through Porter’s five forces
model. The model has helped us in understanding the industry dynamics and
factors that affect the competition.
Furthermore, we have analyzed the growth
strategy of Amazon and found that Amazon’s growth strategy is based on being
customer-centric that has its pros and cons. Being customer-centric has helped
Amazon in being innovative using technology.
Lastly, we have discussed the potential and
feasibility of physical outlets for Amazon.