Strategic Management of Amazon - Research Paper Example

Question Complete a strategic analysis of Amazon by conducting an external and internal analysis of the company. Summarize this analysis with a discussion of the company's TOWS matrix (exhibit 7.2 from Johnson et al.2006) (50 marks) Amazon.com is distinguished by a number of strategic options in almost all areas of its business activity. STRENGTHS External factors - Strategic Options Through partnerships and acquisitions it has managed to create, in a sense, a content portfolio and a portfolio with a significant number of shares of Internet companies, which are distinguished in their field. Amazon has strategic alliances with many companies among them are the following: AOL (with this cooperation Amazon has managed to attract the attention of AOL subscribers), PlanetAll-Junglee (in 1998, this way Amazon showed that it was preparing its structure in order to become a retailer having a wide range of products), Drugstore.com, Dell.com (Amazon bought Dell PCs to reinforce its website with adequate hardware and get advertisement from Dell's website), LiveBid.com - Sotheby's, Hewlett Packard, Borders Group - Toys'R'Us.com (the cooperation with Toys'R'Us demonstrates the flexibility of e-commerce platform to meet the expectations of cooperation and technological structure of leading companies in the Internet space), Adobe eBook Reader (with this collaboration Amazon beat a major advantage of its competitor, it is estimated that the e-book will be in a few years cheaper than a physical book, and it is already known that this new medium has created its own public, which Amazon.com wants to penetrate). By entering in the European market, it has broadened its customer database, it has compressed transport and distribution costs of orders and it has improved the levels of customer service, thus gaining a significant share of the global market. It expands its customer base to new markets in order to augment its profit margin (the structure exists - it has a powerful customer database - it introduces new products - it penetrates new Internet markets - it improves its profit margin). Internal factors - Strategic Options Amazon is very profitable. In 2005 there was a dip in profit and a jump of sales. The profits were reduced to $52m and the sales increased to $1.75bn. The decrease in profits was due to special customer promotions. Amazon locks-in the customer by offering him value through original - innovative value added services and it enhances continuously the content of its webpage. Amazon does not sell in the traditional way, it offers customized service. If indeed, we take account of the fact that the confidence-loyalty of Internet customers is for many analysts of a kind of utopia, it is understood immediately that the strategy of Amazon.com is revolutionary. The company has built a large capital value part of which is its strong name - brand in the Internet and with the experience that it has gained, it manages to exploit its reputation to attract both customers and partners - suppliers by concluding strong relations - partnerships with many competitive advantages and benefits. For Amazon.com the customers and the suppliers are simply two different groups of customers who Amazon undertakes to interconnect by providing them with incentives and transaction facilities. The company is essentially an info broker. The company is an undisputed player in the world of on line cooperation, offering a wide range of programs. Through the continuous provision of incentives, it has managed to succeed and achieve various alliances and syndication makes the company ubiquitous in the Internet and so its brand is strengthened. Amazon.com has managed to transform its product markets into an easy and pleasant procedure mainly due to the use of IT and its innovative applications (1-click Technology).The appropriate use of technology favors the increase in sales by essentially contributing to the lock-in of the customer. Communication with the customer is of even greater value through the logistics procedures of Amazon and the compression of costs ensures the high level of service and creates reasonable conditions to achieve the twin objectives of the company i.e. the most customer oriented electronic store while having at the same time a profitable course. If you look carefully at all the strategies of Amazon.com you will see that none of the company strategies is in isolation - on the contrary there is a consolidation of strategies, since everything is interrelated. As for the future of the company, the opinions are divided, largely because of the instability prevailing in the business world of electronic commerce. Weaknesses External factors There is a risk of damaging Amazon brand. Amazon increases its product portfolio and it does not only focus on books.The consumers may feel confused and this will harm the brand. On the other hand, the free shipping of products may have some negative effects on profits and this will erode the profits. Opportunities External factors Amazon was a pioneer and it has the sales and profits advantage of a pioneer. In addition, it sells its know how to other retail stores. It has made strategic alliances with other companies such as Marks and Spencer, Target etc. With its division which is located in Luxembourg it can offer customized services to retailers in Europe. It has also made an alliance with a company of the Public Sector i.e. the British Library in 2004. Further to its geographical expansion, the company entered the Chinese market by buying Joyo.com. The new corporate strategy of Amazon is to transform the company from an electronic commerce into a provider online of storage and other logistics services. The basic idea is to give other companies the chance to devote more time to their basic business activities. Threats There are those who argue that the operational model of Amazon declines and, as it enters new markets the management complexity will be significantly affected a fact that creates more and more increased costs, while minimizing the margin. Supporters of this view believe that the significant investments in information technology and logistics done by Amazon.com are able to reverse the decline and to make profits. Amazon must also face increased competition both locally and internationally and some of the US rivals may also expand overseas. There is a pressure for increased profits and this is absolutely justified and any delay from a profitable route will harm essentially the prestige of the company. Question 2(a) Evaluate the market strategy of Amazon by applying Porter's generic strategy model. Amazon.com is the modern leader of the online retailing business, primarily involved in book sales. The company was established in 1994 as a small retailing enterprise in the U.S.A. Since then its development entered a booming period, resulting in its current market domination position. It basically constitutes an online info broker. Amazon.com maintains a relatively low but continuously increasing inventory of products, mainly because its entrance to new flat markets. On the fourth quarter of the year 2000 it has made a substantial investment (adopting specialized applications) in the field of Information Technology, mainly because of its continuously increasing managerial complexity and its suffocative pressure to bring profit, after almost six years in the on-line market. The key to Amazon.com successful operations is the combination of supplying customized value added services, which are characterized by a high level of experience,know-how and a continuously extending directory of products, which definitely enforce the content of its site. On the above framework, it seems obvious that the alliances and partnerships with producer, e-retailers and information technology vendors are of great strategical importance for the development of the company. Amazon.com modern ambition is to become the most customer centered online company and at the same time to perform a profitable functioning, using a group of integrated strategies. In the era of network economy being the first to enter a market segment can differentiate and bring cost advantage at the same time. The company should not just sell books but it should offer customized service like information about books that are related to the potential customer that visits its electronic store. The change of this time advantage into a long lasting one gave Amazon the opportunity to create a powerful customer database before the competition with similar companies started. In addition, Amazon's new business model created a real revolution at the market supply chain. According to this model, customers that surf on the Internet can move from webpage to webpage through adequate links and as a result of it each web page to contribute to the profits of the on-line sales earning a specific commission. Furthermore, this business model gave the chance to small and independent publishers as well as writers to sell their products in the Internet without having investment expenses (except the books transportation costs. Amazon bases its strategy on the above fact. It has first set up branches to other countries (e.g. www.amazon.co.uk that serves Europeans with much cheaper transport expenses than the American amazon.com). Then it added more products and made a clear suggestion to the customer:" Buy everything from me and you will have cheaper transport costs." Amazon sees four main success factors of its business model: Extension of its brand awareness Providing to its customers a prominent - added value as well as an elevated experience to the goods market Achieving satisfactory sales Attaining economies of scale The company continuously strives and continues to seek the fulfillment of the above factors through: Expanding the quantity and the range of products offered Providing greater quantity and quality of info related to its content Improving its image in the Internet Developing new technologies (IT) which support customized product promotion and sales techniques and support customers (ability for on-line cooperation) Porter's generic strategies model is consisted of three strategies: cost leadership, differentiation and focus or niche strategy. In cost leadership, the one that produces at the lowest cost gains competitive advantage. Costs are reduced at every part of the value chain. Lower production cost does not necessarily mean low selling price. The companies can benefit from higher profit margin. In differentiation, the competitive advantage could be gained through differentiated goods and services. The companies focus on providing more customer value through differentiated products and thus achieving higher profit margins. Differentiation demands high marketing skills since the company has to segment the market successfully and target and position its products to the various market segments. This brings additional costs which will be offset by the increased sales. The danger in this strategy is that the competition will soon follow and so the company must continuously innovate. The third strategy is the focus or "niche" strategy. This is a strategy more suitable for small and medium size companies since these are the ones that cannot afford cost leadership or differentiation strategy. It is supported that only the leaders in product categories can follow the cost leadership strategy since they are the ones that have stronger bargaining power with their supplies (due to their purchasing strength) and thus achieving lower prices and consequently the production costs of their products is reduced. In the niche strategy, the company focuses on a small market segment and here it can either use cost or differentiation focus. Following a cost focus the company tries to be the lowest cost producer in that market segment. With the differentiation focus the company wants to achieve differentiation leadership in that segment. This kind of strategies depend on various factors such as the type of industry the company is in e.g. in an industry where economies of scale are important cost leadership is unattainable. On the other hand, specialist niches can disappear in the future. The problem with the niche strategy is that since a company becomes very profitable then it can be acquired by a bigger company or it may be attacked by the bigger company since the latter may be interested in that profitable market segment. It could be said that Amazon at least in the beginning has followed the differentiation strategy since it was a pioneer in providing books in the Internet. An additional fact is that in the differentiation strategy there is a strong focus on marketing and sales. By differentiation, Amazon managed to be a pioneer. At this stage of the PLC the company is not interested in reducing prices since it has no competition so it may enjoy high profit margins. As a second step and after having established its position as a leader in the particular market and due to the fact that competition appeared, it also focused on compressing costs through logistics procedures having as main goal customer satisfaction and by the reduction of logistics cost it also tries to achieve its double goal i.e. being acknowledge as the most customer centered electronic store in Internet and at the same time being profitable. Nowadays, it could be said that Amazon follows a "hybrid" strategy which is a combination of cost leadership and differentiation. Although, hybrid is not among the strategies that Porter suggested in his model, it is a strategy that many companies follow, a fact that even Porter not only admitted its existence but also the existence of the "hybrid" strategy. It could be said that the adoption of each type of strategy is strongly interrelated to the stage of the PLC (product life cycle) and that each company adapts its strategy according to the stage of the cycle and according to the current market needs. Question 2 (b) The following statement is taken from a popular text book on strategic management " To summarise, while the ideas of Michael Porter can be questioned and debated, they nevertheless provide an extremely useful framework for analyzing industries and competitive strategy." (Thomson and Martin, 2005, page 293) What do you consider to be the strengths and weaknesses of the generic strategies framework Porter's model of generic strategies has described three strategies that the businesses commonly use to achieve competitive advantage. These strategies are defined by the strategic scope and strategic strength. The generic strategies are three: cost leadership, differentiation and market segmentation whereas the latter is narrow in scope and the previous broad in market scope. Porter explained why companies with high and low market shares can be profitable whereas the companies in the middle are not that profitable. This was due to the fact that companies with high market shares follow the cost leadership strategy whereas the companies with the low market share follow the market segmentation strategy. The companies in the middle do not follow any viable generic strategy. Since then, there has been an evolution on the cost leadership concept and there has been a distinction between low and best cost strategy. The low cost strategy i.e. offering the cheapest, usually ends in price wars. The best cost strategy is the one that differentiates the company and can offer a competitive advantage since it offers the best value for a relatively low price. In addition low cost leadership leads to less customer loyalty since low prices transfer an image of low quality. It is also very difficult for a company to be able to maintain a continuously low base. Some authors think that the generis strategies model lacks specificity, flexibility, and are limiting. Porter suggests that only one company should by followed by a company and if the company does not succeed in achieving it then it is "stuck in the middle" since the company will lose its focus. Miller (1992) questions the notion of being "stuck in the middle". He claims that there is a viable middle ground between strategies. In fact from empirical research it is shown that companies can follow the so called "hybrid strategy" i.e. a combination of low cost and differentiation strategy and it is proved that they have brought better results than companies following a single strategy. Modern world demands a rapid shift and flexibility in strategies and this is something that Porter has accepted i.e. the existence and success of the hybrid strategy. Porter's generic strategies model confuses the following: where to compete and how to compete, competitive strategy with corporate strategy and it excludes other feasible strategy options. Porter uses broad definitions for industries so the focus is more on where to compete rather than achieving competitive advantage. In addition there is not a clear distinction on the competition. Who is the actual competitor Do companies are compared on the segments they serve The competition of a company should be based on the customer definition. Who is the customer and which companies serve this customer. Concerning now competitive and corporate strategy. Businesses follow different strategies in different markets, they do not follow the same generic strategy in all markets. A company can offer a wide range of products thus achieving product differentiation but due to economies of scale it can at the same time achieve cost advantage. Does the company follow cost leadership, differentiation or hybrid strategy In addition, the strategy of an enhanced product with competitive price is not one of Porter's options. Furthermore, not all customers belong in these two categories i.e. customer willing to pay premium prices for a better product and price sensitive customers looking for an average product. Each category has many subdivisions as reality shows. The generic strategies should not substitute managers' thinking, they should only be seen as food for thought because otherwise they will do more harm than good. Nevertheless, the value of Porter's generic strategy model cannot be underestimated. Question 2(c) Use figure 6.8 ("Competitive advantage through customer commitment") from Thompson and Martin (2005, p.297) to critically analyze the method and ways that Amazon uses to sustain its competitive advantage. (50 marks) Amazon's competitive advantage is consisted of the following: It offers a wide range of products which is continuously expanded. It provides an effective interaction channel to the consumers by offering them continuously a wide range of services oriented to customers that derive from various sources. These services involve Amazon's prominent characteristic i.e. the information level for all of its products that is offered to the visitors of Amazon's website. These services are the summaries, critics and the proposals that the company suggests to the customer. The content of the above info comes not only from the company's staff but from the readers, the writers and the editors. Everyone can write his/her opinion. In addition, the visitors can express their opinion on the information provided. Amazon, through feedback, has created an extensive customer community i.e. it has gathered a database that contains the preferences and the buying profiles of its customers, it has, in a sense, locked-in the customers since it knows their email and home addresses. As a result the company sends information emails and special offers to each customer individually. Amazon claims that it can send its products to any place on Earth. Since 2000, Amazon has managed to achieve the best stock advantage (reducing product availability time and at the same time reducing stock) in cooperation with companies that are specialized in logistics and in Information Technology. In September 1999, Amazon expanded the sales of services to business owners by establishing zShops, a new retail environment. The zShops provide to vendors all necessary supplies to create virtual shopping windows in order to introduce to market their products and to be paid by credit card, a transaction is managed and guaranteed by the company Amazon.com. This integrated solution continues to attract thousands of vendors and is up to now the main characteristic for the company of the high level of sales services. The latest addition in this area is Amazon Marketplace, which began operations in November 2000 and it further reinforces the common belief that Amazon's web site is the best place for on - line transactions because of the lure of 30 million customers of the company can not let any vendor, author, publisher or manufacturer indifferent. It is true that in the Marketplace Amazon, the first four months of operation, the monthly gross sales of products tripled. The Marketplace is a new service of the company, which allows customers to buy and sell secondhand products or collectors' items directly from the description pages of Amazon. In addition, it enables customers to compare prices of products used to brand products, while the opportunity to buy many products is given, which in other circumstances (high prices) the customers would not know about them and neither would they ever acquire them. Consequently, the Amazon Marketplace creates new interests to customers and thus creates real value for them. It is a construct of added value for the company having amazing potential. Syndication makes the company ubiquitous. Amazon is the undoubted player in online collaboration by offering a wide range of programs. The program ADVANTAGE encourages all the independent publishers and authors of books and musical CDs to introduce directly their products to the market through its website. The subscription to this program can be done through email and it is free. Then Amazon binds a pool of product titles that are approved by the above program. The company continuously checks the stock of these titles and when it is considered necessary (the stock is reduced) a new order is done automatically through email. The fee of the members of the program Advantage is 45% of the price catalogue and the total monthly amount of sales that take place is sent automatically by cheque. Every type of communication with the members of the program Advantage is done through email. The program Associate whereby AMAZON allows visitors of associated websites to have direct access to its products. Each partner of the company earns a fee. The fee concerns the link of the partner site with the front page of Amazon. For sales made by Amazon through specific links, its partners are paid with an amount ranging from 5% to 15% off list price of the product. Each Amazon partner displays on the website an icon that indicates the cooperation with the company and s/he receives by the company, on a weekly and quarterly basis, reports that inform him about the amount of his/her remuneration. And in the case of its partners, Amazon provides on line assistance to potential members of the Associate program to expand its connections to the Internet and thus to expand its activities. Until now more than 530,000 websites participate in this program, making a multiplier effect of Amazon's power in the world market, while its partners improve their content and attract more visitors. Such programs are expected to make rapid growth in the near future, since they involve significant benefits. The distribution and order execution centers of the company exceed an area of 4.5 million square meters. In the U.S. five such centers operate on a permanent basis and a performance center and seasonal distribution of orders exists in Seattle. Moreover, in Europe operate three such centers, in the United Kingdom, France and Germany. Finally, in Japan the management of the execution and distribution of products is done in collaboration with the company Nippon Express. These centers enable a meaningful and timely transportation and delivery of products to customers. From the foregoing it is understood that Amazon faces both consumers and suppliers of products as customers, trying to provide them with incentives and transaction facilities from its electronic shop. It knows that by giving value to the customer, in the broader sense, it maintains a credible relationship with him by enriching its strongest competitive advantage i.e. its customer database. In relation to Thompson and Martin's competitive advantage through customer commitment model, it could be said that Amazon is really committed to customers through positioning and change as it is seen from the above. It provides high levels of service and is generally customer specific since it offers customized services. It also gives emphasis to cost management since its investments in IT and logistics focus on reducing costs. Image is also very important to Amazon and its brand is very well known. The last part which is product/service performance through quality, reliability and speed of change is something Amazon achieves through the customized services and its internal IT infrastructure improvement. References Shapiro C., Varian P.H. (1999) ," Information Rules", Harvard Business School. 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