Strategic Decisions That Led to Success of Amazon - Case Study Example

Amazon.com Since it was founded in 1995 one of the mottoes of Amazon.com seems to have always been, ‘Think Big.’ In fact founder and CEO Jeff Bezos named the company after one of the largest natural wonders in the world, predicting that it would become the largest bookseller in the world. In 1997 Amazon.com was offering over one million book titles, all of which were at a substantial discount as compared to brick and mortar bookstores. This Seattle, WA based company began by buying books directly from the publisher once an order was received. This initially eliminated the cost of warehousing inventory. Since July 1995 when it began, Amazon.com has enjoyed a 30 percent increase in business every month. Industry analysts believe the company is grossing up to $12 million a year. This was in spite of the fact that up until recently Amazon.com was not turning a profit. (Horvitz 1997: 37) Bezos believed the power of the Internet lay in continuous communication and word of mouth, which made branding even more important. As a result he chose to name his site after the world’s largest river, believing Amazon.com would become the biggest bookstore in the world. (Stockport & Ivory 2004: 648) He was somewhat mistaken. Now amazon.com has not only become one of the largest bookstores in the world but it is also one of the largest on-line retailers for just about everything both new and used worldwide. As mentioned previously one of the main driving forces for Amazon.com’s strategic intent in the marketplace was to be the biggest provider of goods and services to the largest amount of customers. This required a great deal of planning and certain focus to bring it all together. A central tenet of Amazon.com’s strategy, therefore, had been the customer-focused innovation designed to improve the convenience of the online shopping experience. This had included offering the world’s biggest collection of goods and services in a vast array of categories (Stockport & Ivory 2004: 648) They achieved this by paying very close attention to the needs of their customers and putting in place the strategic technologies and the support services necessary to do so. They completed this strategy but a great deal more was needed in order to keep up with the technological changes that were happening in leaps and bounds as well as keeping pace with the changing marketplace around them. They experienced ‘first mover’ growth between 1994 and 1997, but the competition was soon piling up, companies such as Barnes & Nobel as well as E-bay and other on-line retailers were quickly cutting into the profits of amazon.com. (Stockport & Ivory 2004: 649) They now needed to raise some capital in order to keep pace with other ‘second movers’ now in the field: Amazon needed more money to finance its growth, but was undoubtedly worried about breaking the spell over its share price…Instead, it sold ‘convertibles.’ These are bonds that pay interest but can also be, at the company's option, converted into shares if the company's underlying stock price rises to a stated level. Amazon's bonds were convertible when the share price hit $2.34, a level that seemed plausible in early 1999, when the stock had already rocketed to $200. The equity conversion option allowed Amazon to get away with paying a lower interest rate than a risky start-up otherwise would have, and it could avoid having to dip into its meagre cash flow for interest payments at all if the stock rose to the conversion price. (Jenkins 2003: 22-23) This was a risky move but turned out to pay off strategically by giving them a well needed boost of necessary capital in order to continue to upgrade and improve not only their technology but also expand upon the different kinds of items and services they were providing. They were turning into an online superstore. ‘The vision has upgraded slightly from being the biggest bookstore in the world to being able to find ‘anything with a capital ‘A’ on their website.’ (Stockport & Ivory 2004: 660) Amazon.com lowered prices even further in 1997 on over 400,000 titles. Hardcovers had at least 30 per cent off, paperbacks at least 20 per cent off, while specially featured books were up to 40 per cent off. This meant the company offered the lowest hook prices anywhere in the world, online or off. Additional discounts were also avail-able on all audio books as well as calendars in all categories. These price reductions encouraged more repeat purchasing online as cumulative customer accounts grew to over 1.5 million at year end, a growth of over eight-fold from 180,000 customer accounts at 31 December 1996. (Stockport & Ivory 2004: 650) Stakeholders had always been a major concern from the very beginning of Amazon.com’s inception. Not only were the company’s employees and executive staff considered to be stakeholders, but by its very nature the company had to partner with all of its suppliers and affiliates making them part of their stakeholders also. Publishers and clearing houses all were coming on board when the realized the potential marketing increase to their titles. Contracts were negotiated with all supply chain members, which gave Amazon.com a clear advantage in pricing across the supply chain. Consequently, this also had the effect of muscling out many of the smaller mom and pop booksellers that were out there, much to the chagrin of many. Amazon.com also extended its strategic relation-ships, with a deal leading to the co-branding of Dell Computers and Amazon.com home pages on their respective websites. Amazon.com also announced strategic investments in the following companies who they believed were aligned to offering customer value through selection, service, convenience, and community. (Stockport & Ivory 2004: 653) These included such participators as Drugstore.com, Pets.com, Della & James’ wedding-gifts, Homegrocer.com, Gear.com, Exchange.com, Biblinfind.com, as well as local and regional auction houses. Their supply chain is growing more and enormous and diversified each day. Each one has become a stakeholder that grows equally more and more dependent on Amazon’s link in the chain of online retailing. Currently, amazons being a publicly traded company, their stakeholders are also their stockholders and with this come a higher level of corporate and financial responsibility. But well beyond even these important concerns are the customers that shop there. Stakeholder ethics has permeated the company and those who use it are an interactive part of the process as well. Customers become stakeholders, especially those that turn around to sell their products through one of the many merchant arrangements for many different levels of entrepreneurship. One of the main resources of Amazon.com is its constant vision to grow and change. By never accepting conventional limitations, either financially or commercially, it has grown larger and more diversified in spite of dire predictions by Wall Street and other financial analysts during its history. Their growth and diversification often occurred at times when there was little or no profit actually being generated by the company itself. Their strategy has been one of constant reinvestment and change to adapt to the customers’ need and the marketplace. But they also have had to keep a watchful eye to the bottom line so as not to run the company into the ground: The cost-cutting response to losses continued in 2001 but on a much larger scale. Employees were reduced by 1,200, the warehouse in McDonough, Georgia was closed as was the service centre in Seattle, and the company also announced that the service centre in The Hague, Netherlands would also be closed. Other closures or scale-downs were being considered as the company’s financial reports noted unoccupied warehouse, service and office space. Despite the cost cutting, the market remained unimpressed as stock prices fell to a weekly low of $5.97 on 24 September 2001 from a weekly high of $106.69 on 6 December 1999. (Stockport & Ivory 2004: 655) As a first mover in the field of on-line retailing, Amazon.com has also set the standard for the marketing of products on-line. They have developed a platform that offers the following services to customers that are looking to purchase products on their web site. They offer customers the opportunity to browse by categories as well as search for specific products. They also offer reviews of products as well as other content ‘to enhance the customer’s shopping experience and encourage purchases.’ (Stockport & Ivory 2004: 660) Their staff gives recommendations of products and the system also allows you to personalize your account in a number of ways. This includes such features as one click technology that allows a registered customer to click once on a target purchase and the order is competed and on its way, with one click of the mouse. They of course also have secure credit card payment services and most of their products, unless otherwise noted, are available to ship within 24 hours with a full variety of shipping methods. Amazon.com is also what is known as a market driving firm, one that is on the cutting edge of innovations and technologies so much so that they are movers and shakers of the marketplace itself. This particular model of doing business quite often results in a highly sustainable advantage and superior long-term performance even in periods of recession and market downturns. … the market-driving firm employs a radically different approach. Here, firms create entirely new markets, produce discontinuous leaps in customer value, design unique business systems, develop new channels, raise service to unprecedented levels, and fundamentally change the rules of the competitive game (Kumar, Scheer, and Kotler 2002). While market-driven companies are excellent in generating incremental innovation, market drivers produce radical innovation in products, business models, or value creation networks. Key differences between market-driven and market-driving. (Schindehutte, Morris and Kocak 2008: 5-6) One of the other influences in their strategy to maintain sustainable advantage is again their vision and performance strategies as regards investments in technology and innovation. In a letter to shareholders in 1997 and reprinted later in their 2002 annual report they are stated as follows: We will continue to locus relentlessly on our customers. We will continue to make investment decisions in light of long-term market leadership. We will continue to measure our programs and the effectiveness of our investments analytically. to jettison those that do no provide acceptable returns, and to step up our investment in those that work best We will continue to learn from both our successes and our failures. We will make bold rather than timid investment decisions where we see a sufficient probability of gaining market leadership advantages. Some of these investments will pay oft, others will not, and we will have learned another valuable lesson in either case.. When forced to choose between optimising the appearance ol our GAAP accounting and maximising the present value of future cash flows, we’ll lake the cash flows. (Stockport & Ivory 2004: 661) One of these ‘investments’ in ideas came in the form of creating affiliates and associates with which they represent themselves on other people’s Web sites, creating a domino effect that to date has not ended. Under Amazon's model, websites can sign on as ‘associates,’ and offer links to Amazon's site from their own. Every time a website visitor clicks on the link and buys something from the bookseller, the Amazon associate gets a small commission. Currently, Amazon's affiliate program is one of the most commonly used affiliate models on the Web. Commissions typically range between 1 and 15 percent. And derivatives of the model sometimes offer a two-tier commission structure--paying higher-trafficked websites higher commissions for referrals. (Dysart 2002: 38) Another idea that was implemented was their ‘See inside books’ feature, giving customers some moderate access to material inside the items they were looking to buy. ‘We believe that the more information you give a customer about the products they're interested in buying, the more of those products they actually buy,’ said Jani Baker, director of product public relations, in a phone interview. In the first five days of the ‘Search Inside the Book’ program, sales of books that participated were 9% higher than sales of nonparticipating books, she said. (Goldsborough 2004:12) With Amazon.com’s sales in the billions of dollars, 9% can become a very important percentage increase. Another innovation that would seem to run counterproductive and certainly counterintuitive to the commercial sales philosophy as well as jeopardizing good relations with authors of titles is the ‘Marketplace’ feature. Here you can purchase used books from other customers just as easily as you can buy new books from large publishers and the cost savings are quite significant. This, of course, can mean a potential loss of profit for authors as well. Resale of used books while economical and environmentally friendly does not profit the writers or the big publishing houses. Amazon.com also defends this practice, ‘Amazon.com is all about selling more books and helping customers find and buy books they wouldn't have known about,’ said Baker. (Goldsborough 2004:12) As for the future, the writer of the case study asks a valid question, ‘Is the logical end-game scenario being the Wal-Mart of the Internet?’ (Stockport & Ivory 2004: 661) Can they continue to innovate and provide more and more services and products, trying to be all things to all people. Apparently for the short-term future the answer is yes. With technological growth and change also comes more and more advantages for Amazon.com and other online retailers to grow, change and mutate into other areas of business. They may segue into real estate sales and purchases; they could start looking into the financial markets as well. One area that should be explored is further implementation of online services, such as highly specific web search engines and perhaps web page hosting as well. The ultimate would be for Amazon.com to become a Google for all published content. Just as you can search the Web now, in the future you may be able to search through the typically higher quality information published in books. Time will tell if this will happen comprehensively and how it will affect book sales. (Goldsborough 2004:12) While there are certainly many different directions to go, Amazon.com has always had plenty of potential and enthusiasm to grow and expand. By keeping service their number one priority and profit as a motive for that growth, they will certainly maintain a sustainable advantage for the future. When asked about the future Bezos had the following to say: The three most important things in retail are location, location, location. The three most important things for our consumer business are technology, technology. technology. That’s what takes the place of Real estate in out business. (659) While this is absolutely true, their focus on customer service and using that technology to improve it and to actually offer service not previously available will sustain their growth and development into the future. List of References Dysart, Joe. 2002. ‘Click-Through Customers.’ ABA Banking Journal 34: pp.36-38. Goldsborough, Reid. 2004. ‘The Brave New World of Book Buying.’ Reading Today, February/March, p. 12. Horvitz, Leslie Alan. 1997. ‘Are Chains Stcking the Shelves against Traditional Booksellers?.’ Insight on the News, February 24, pp. 36-40 Jenkins, Holman W. 2003. ‘The New Economy's Sore Losers.’ Policy Review. pp.21-27 Schindehutte, Minet, Morris, Michael H., and Kocak, Akin. 2008. ‘Understanding Market-Driving Behavior: The Role of Entrepreneurship.’ Journal of Small Business Management 46: pp.4-9. Stockport, Gary J & Ivory, Mark . 2004 ‘Amazon.com – from start-up to 2004’ Read More