Amazons Business Model and the Operational Strategies - Coursework Example

Amazon’s Business Model and the Operational Strategies Introduction Amazon.com uses pure play strategy as it conducts the sales of its products and services to its customers entirely via the Internet. The pure play strategy enables Amazon to have lower overhead costs in comparison to its major competitors such as Barnes & Noble and Borders which have to contend with extra cost in running physical stores via their brick and click strategy. Amazon generates it revenue from multiple streams namely sale of products from its e-shop, affiliate commissions from its marketplace partners, and (currently) through leasing part of its server capacity for Cloud computing. Amazon has been able to pull of its business model through the use of three operational strategies to enhance its competitive advantage: low-cost leadership and customer differentiation. However, when we evaluate Amazon’s business model and the operational strategies that underlie it they greatly resemble those of its key competitor Barnes & Noble. Barnes & Noble also used its economies of scale to support low-cost leadership, it broke new ground by developing software that would enable its customers personalize their web pages and also enjoy the results of collaborative filtering (Ghemawat 13). The difference in one organization’s choice to use a pure play system while the other uses a brick-and-click system is too simplistic to explain the relative success of Amazon.com over Barnes & Noble. This would be best explained through the dynamic capability. Dynamic capability and its processes Dynamic capability refers to the ability of the firm to purposefully create, extend or modify its resource base so as to achieve congruence with the changing business environment (Menon and Mohanty 3). Of importance to note is the use of the word “purposefully” which negates the element of accident or luck. Dynamic capability involves intent and the emergent stream of activities within an organisation that are taken with a certain implicit aim. Although dynamic capabilities are equifinal and exhibit commonalities across firms, performance differences arise between firms due to both cost and differential timing with which the dynamic capabilities are used (Menon and Mohanty 5). They are path dependent processes thus are idiosyncratic and difficult to imitate. Dynamic capabilities can be a source of competitive advantage. That is why even though Barnes & Noble seem to be following similar operational strategies to Amazon.com, the results are different for each firm. Issues have been raised about the product, geographic and vertical scopes that these two firms are undertaking and as to whether Amazon’s rapid expansion approach will be sustainable in the long run. Dynamic capabilities constitute of first order processes of sensing, learning, reconfiguration, coordination and integration. Sensing reflects the ability of the firm to effectively generate, disseminate and respond to market intelligence on customer needs. It helps the firm understand its environment; identify requirements for market, and opportunity for new resources (Menon and Mohanty 5). Amazon.com always matched and bettered Barnes & Noble (B&N) on price, number of available titles, in forming agreements with other major Internet players, and technology. Other than simply match B&N’s various strategies Amazon.com always seemed to have anticipated the moves and gone further for example whereas B&N broke new ground with personalization of web pages and collaborative filtering, Amazon went further with these technologies. Learning as a capability is the ability to acquire, assimilate, transform and exploit existing knowledge to generate new knowledge (Menon and Mohanty 6). Amazon has instituted a culture of metrics within the firm that it supports through development of necessary tools to be used for analysis and evaluation. Also, in support of learning Amazon has developed a culture of experimentation for examples to test different algorithms for recommendations, new home page design and so on. Reconfiguration involves changing the existing configuration of resources into new ones that match the changing environment. It can be summarised as the appropriateness, timeliness, and efficiency by which existing resources are reconfigured into new operational competencies. From literature Menon and Mohanty (6) identify three major mechanisms for reconfiguration: gain or release of resources, combination of resources, and redeployment of resources. Apart from these primary mechanisms there are approaches such as reconfiguration through experimentation, imitation, innovation, and so on (Menon and Mohanty 6). In 1999, Amazon launched Amazon auctions (then referred to as zShops) in response to the success of eBay. This imitation strategy flopped and the company reconfigured these resources into Amazon Marketplace which has turned into a success. Finally, coordination and integration in dynamic capabilities are processes that help the deployment of reconfigured resources. The primary activities involved in coordination are task assignment, resource sharing, and managing dependencies while the major tenets of integration as a dynamic process are contribution of individual to group outcome, representation and subordination (Menon and Mohanty 6). Issues Two areas where Amazon.com clearly betters Barnes & Noble are in product expansion and geographic expansion. The question however is what extent is expansion beyond music, videos, DVD’s etc. sensible? And should Amazon pursue both product and geographic expansion simultaneously? This two question can best be responded to by first evaluating Amazon’s virtuous cycle. Amazon prides itself for having a lower cost-structure than its competitors which allow it to sustain its lower prices. However, for lower prices to make sense Amazon must drastically increase its sales revenue, which in the online marketplace can only be realised through having a bigger network of customers. Both product and geographic expansion go a long way in increasing traffic and community, which directly affect Amazon’s network effects. To increase traffic and sustain a thriving online community, Amazon spends huge amounts on improving the customer experience at its web shop for example pioneering one-click check off, or for its merchants the Fulfilment By Amazon (FBA) program allows them to direct inventory to Amazon’s fulfilment centres and continuous website improvement (Ram 16). On increasing its selection, Amazon has entered into partnerships with market leaders such as Sears, Toys R Us, and Marks & Spencer etc. Conclusion Amazon is in an industry that has intense rivalry to the extent that competition is based on price. For most players their strategies revolve around attaining economies scale and cost efficiencies to sustain their “everyday” low prices. Muller (18) argues that for Amazon to survive it must avoid price competition, by applying more differentiation strategies. However, to accomplish this, Amazon would have to increases its R&D spending which will lower its margins. Muller (20) forecasts Amazons future performance and is sceptical that Amazon will be able to boost margins above levels for the average retailer primarily because of its increasing R&D spending and increasing cost structure represented by the firm’s building of its own warehouses to improve its logistics. Works Cited Ghemawat, Pankaj. “Leadership Online (A): Barnes & Noble vs. Amazon.com.” HBS Cases 16 Mar 2004 : 1-19. Print. Menon, Adwaita Govind, and Brajaraj Mohanty. “Towards a Theory of ‘Dynamic Capability’ For Firms.” 6th AIMS International Conference on Management. Greater Noida, Delhi: AIMs International, 2008. 1-10. Print. Muller, Turley. “Valuation Analysis: Apple vs. Amazon.” Financial Alchemist: A Conglomeration of Commentary Regarding Investing and Financial Markets 30 Oct 2007. Web. 2 Apr 2011. Ram, Melvin. “Marketing Strategies of Amazon.com.” 22 June 2009. Web. 3 Apr 2011.  Read More