Strengths and Weaknesses of Amazons Strategy - Case Study Example

Amazon-2002 Critical Analysis [Pick the Strengths and Weaknesses of Amazon’s Strategy Amazon is one of the pioneers in internet-based businesses that have managed to transform the landscape of this industry. Unlike entities like, eBay and Yahoo!, Amazon has focused to capitalize on opportunities in hand and exploit them to its fullest. According to the case study, Amazon has been revolutionizing its business processes in accordance with customer’s demands. Amazon’s business model enables it to have several strengths; such as global existence, ability to focus on research and development, customer-centric approach, diversity in product range, applied advance technology, enhanced merchant program, skilled employees and an impeccable logistics network. The ability to operate online gives Amazon access to global retail market, something that competitors find difficult to replicate with the enhancements provided by Amazon. Where many companies have adopted E-commerce model, the application of this concept embedded with rich experience offered by Amazon is difficult to achieve. A careful analysis would reveal that Amazon has been constantly expanding and transforming its business processes to ensure that the customer gets ultimate satisfaction. Development of zshop and marketplace segment is one such example that allows customers to have access not only to the products of Amazon but have a wide range of variety to make a selection from. Hiring third parties for logistics is also one of such examples which would ensure speedy delivery and ultimate customer satisfaction. Amazon has shown commitment to continuously improve and evolve its business processes which includes consistent efforts and investments in research and development. Designing and customizing an interface which would portray a wide range of products with unlimited filters and separate logs with web-pages for different producers, merchandisers and sellers displays Amazon’s commitment to provide convenience to the customers. Later on, Amazon decided to invest on designing another interface which allowed all its product details and suppliers to be visible on the same page. Such transformation involved a great deal of research and development because of the varying nature of suppliers, their businesses and also their product lines. Amazon is known for exploring the opportunities offered by technological advancements. It began with a pure-play business model however with the expansion in business and need for better inventory management, it transformed into e-commerce model which had order taking, processing and remediation executed through on-line medium but rest of the activities followed a typical retail model including after-sales services (Weston & Brigham, 1974). Adherence to its core values of customer-oriented services act as its main strength which allowed it to offer customers with a virtual experience with satisfaction. Amazon’s merchant program is also one of the strengths helping it in reaching a large segment of customers with a share of merchandisers’ business. Its existence over almost two decades allows Amazon to have a rich experience and significant insight about technicalities involved in virtual business. This knowledge base and technical inventory gained over time allows Amazon to become a market leader in e-commerce industry. Exploiting this strength of Amazon, it has managed to offer services that involve complete e-commerce management options to its merchants which are mainly large sellers including multi-purpose departmental stores and also leading global brands. Another option offered to large sellers is its merchant.com services and syndicated stores. This separate service allows it have a singular view of the departmental activity and also gain revenues with the help of existing expertise without major investment in research and development. Further strengths include its skilled workforce which has helped them in streamlining operations and also setting its strategic plans and efficient business processes. Another major strength is its ability to deliver products globally, which is backed up by its premium logistics system with established partnerships around the world. Further careful analysis would reveal that unlike other retail businesses, Amazon does possess certain inability to access customers due to lack of physical presence. It currently contributes to only 1 percent of overall US trade. There is a large range of consumers who show reluctance to perform buying online due to reliability factor and also desire to examine the goods physically before actually buying it. Secondly, Amazon enjoys relatively low profit margins as compared to other competitors like eBay due to excessive suppliers available on its website. Although, it is determined to answer cannibalism by increased fee from merchants however it has to increase its trading immensely in order to replace individual profit margins by service fee. A weakness of Amazon’s expansion strategy is adding new categories in to its business, from selling books it went on to sell DVDs, songs, video games, apparel, furniture, computer software, electronics and even food and toys. Adding new categories to its business could confuse Amazon’s customers and hurt its already established brands. Another weakness in conducting its business is the free shipping offer that can cost the company a fortune in coming year, an estimated USD 50 million worth of free shipping can hurt the profits of Amazon. The launch of kindle was supposed to compliment the strengths of Amazon as an e-book seller but iPads and mobile phones with high definition and large display screens are better to look at than any kindle. In this regard Amazon needs to lock its e-books to its hardware as they cannot compete with the hardware provided by Apple or Samsung. A separate extension or a file type like (EPUB) can serve this purpose well for Amazon, and link its e-books to Amazon apps running on personal computers or Kindle devices. Furthermore, Kindle devices are sold on no margins and hence profits are only expected from selling e-books which is highly risky and produces very low margins for the company and the shareholders. Another weakness Amazon needs to work on is to attract people besides the expert readers hence increasing the profit margins and overall revenue. 2) External and Internal Analysis There are various internal and external factors having implications on overall business strategy of Amazon. Careful analysis indicates that Amazon has various opportunities that it can exploit in order to gain considerable market share in U.S. and across the globe. Amazon has its major business streamlined with the help of technological advancements. Further innovation in this area would enable it to have increased revenues. Secondly, Amazon has been experiencing increased customer base in South Asia specially India and China which are two of the most populated and highly technology-oriented economies (Cohan, 2010; Buncombe, 2011). Thirdly, growth in social media networking and online downloads is one of areas which have shown tremendous development in last five years. Where Amazon is already a pure-play entity, its emphasis on enhanced access to the customers through social media would help in increasing its customer base. Furthermore, adding movie downloads and streaming its overall product line will also help in increasing revenues based on singly-time acquisition inventory. Growth in digital media also acts as one of the major opportunities available to Amazon. Where Amazon has been enjoying a niche in book and intellectual property selling, it can further step into eBook selling with minimum investment. Although many publishers offer eBook versions which are available online, however out-of-print and older versions still pursued customers to buy a hard copy of the required book which is difficult to carry and accommodate during travelling and makes the company incur warehousing and transportation costs. One-time investment in getting these books typed or converted into audio versions would allow them to provide downloadable versions to the customer instead of physical delivery. The overall idea would allow the customer to experience convenience and will help Amazon in reducing cost incurred in printed merchandise sale. Another major opportunity is increased customers spending in South Asia including Pakistan and India. With recovery from economic crunch, developing economies are showing inclination towards online spending and Amazon can take advantage of that. With various opportunities, Amazon also has various threats which have a tendency of hampering its business. These threats include patent infringements, strong external and internal competition, increased labyrinth search structure and also over-dependence on vendors. Amazon has been currently facing many law suits due to violation of intellectual property laws related to internet storage system for routing data, desktop virtualization, graphical user interface etc (Brohan, 2011). Furthermore, Amazon has integrated all the suppliers and merchandisers details on the same webpage which has increased the filter tabs and has given the webpage a labyrinth structure which is taken as a threat by various vendors (McMillan, 2011). In addition to that, Amazon has been reducing its storage capacity and has limited warehousing facility which makes it over dependent on its suppliers for timely service management. This may give suppliers an opportunity to exploit Amazon and affect its business integrity. Secondly, Amazon takes responsibility for frauds and defaulted pieces in some cases which also give an edge to its suppliers 3) Theories of Strategic Management Critical analysis of Amazon’s strategic management over the years would indicate that it is highly influenced by cognitive, learning and transformation schools of thought (Mintzberg & Lampel, 1999). Amazon has been based on an idea borne by its founder Bezos who initiated with exploiting technology for a simple retail-based business model. However, further learning of existing potential in this field, consumer’s preference, advancements in marketing media and technology enabled it to transform into a learning organization which shows constant adaptations to innovative strategies. Lastly, its constant adaptation also shows an influence of configuration school of thought. Entrepreneurial organizations show dynamic transformation due to their potential of adapting to change caused by flexibility in overall operations. Amazon began with a simple retail book selling business with virtual presence but grew into a multi-faceted empire which not only operates on its own but also has various strategic alliances. Its further knowledgebase acquired through learning helps it to capitalize its strengths and offer similar services to various other entities as well. If Amazon is evaluated on the grounds of various definitions of strategy itself, Amazon appears to have a multifaceted model of strategic management. According to Mintzberg (1987), strategy can be adopted by an organization in various forms such as plan, ploy, pattern, position, and perspective. A thorough analysis would reveal that Amazon has adopted and amended its strategy with reference to the framework defined by Mintzberg (1987). Where plan defines the course of intentions, it is clear that Amazon was a simple business idea which was realized by its founder and then expanded accordingly. Instead of being a ploy (a gesture intended to beat the competitor), Amazon has focused on having long-term strategy which would allow it not only to have a competitive edge over its competitors but also have a sustainable market position. Amazon has also adopted strategy as a pattern which is a course of actions emerging out of previous business practices and resulted in better customer retention and expansion. Previous practices have enabled Amazon to develop policies and procedures which are intended to provide better service to its buyers as well as its vendors. Although, this notion is not documented in the form of mission statement but the practices followed by Amazon clearly reveal that it is committed to learn from past practices and evolve accordingly. However, where pattern proves helpful in maintaining a customer services level, planning is the major strategic tool used by its management. Emergence from mere book seller to CDs, DVDs, and other merchandise over time with constant evolution in its business model i.e. merchant system and single store strategy from zshop and marketplace model, illustrate that planning has been a major strategic management practice adopted by Amazon. Over time, Amazon has managed to transform its strategy from entrepreneurial model to umbrella and planned mode of strategy formation. It is the unarticulated vision of Amazon’s founder which has acted as a foundation of its present business model which is highly structured and well-organized. Careful analysis of Amazon’s overall business strategy would reveal that it has been amending its structure and processes in the light of Systematic theory. The theory defines a broad horizon of carrying out business activities. According to this theory, the objective of business is to become successful according to the social norm. Although Amazon has a been a pioneer in its field but it has grown over time and changed its processes in the light of potential present in the industry. Its management analyzed customer’s requirements and moved on from a portfolio of a book seller to a multi-dimensional online commodity provider which excelled in all kinds of services. As far as the question goes that ‘How’ did they achieve it, it is important to analyze the overall business processes of Amazon in order to identify what they did different from others. Its senior management evaluated the consumer’s expectations not only from Amazon but also from other service providers in the industry and introduced a range of products with a mechanism that ensured that the consumer gets what he/ she wants in the most convenient manner. Amazon initially placed itself as an online provider of books however it identified a potential need of online seller for other commodities which consumer required as a replacement of traditional brick and block sellers, in order to save time, energy and have more options available on just a on a click. Realizing this potential of business present in online marketing, Amazon capitalized on consumer’s expectations and presented a solution which was exactly according to the requirements of the customer. In the systematic theory, it is manager who makes the decisions and these choices are defined and guided by social norms and vales. This theory further illustrates that the manager is capable of analyzing situation and amending business strategy accordingly. Therefore, there is a not fixed or universal structure of strategy defined. Case study of Amazon defines how its founder who is the actual business leader has amended the business strategy multiple times on the basis of current market requirement. Initially, Amazon moved from single-commodity seller to a global online store providing consumer access to a desired literature. Furthermore, it expanded its services line and introduced goods i.e. Kindle, to assist its customers in using the same commodities but in a different manner. Hence, it identified the potential existed and introduced a range of peripheral products along with the main products. Then, introduction of other sellers and vendors from its platform and charging for a service made it a complete business venture with multifaceted business operations. Later on, it made further changes into its web layout and overall business strategy multiple times i.e. introduction of marketplace and allowing other vendors to display their products with Amazon on the same web page, showed that its managers made decisions based on social norms and customers requirements. Amazon has managed to remain sensitive to customer’s requirements and amend its strategy accordingly. It identified what customer required, expanded and managed its resources accordingly, learnt from its rivals i.e. the traditional sellers and in the light of this business insight presented what the customer required which is a secret of Amazon’s stability. 4) Amazon’s Leadership and Origin of Strategy Amazon has initiated with the unilateral vision of Jeff Bezos whose vision appears to be embedded in its overall business model. Bezos philosophy related to providing optimum customer services experience, having long-term strategic goals, becoming a market leader through relentless investment, having a clean organizational culture, growing as an organization with skilled workforce, is reflected in every procedure carried out by this organization. Although during its expansion, Amazon has sustained losses as a global entity but its constant transformation and expansion display its internal potential of emerging as a market leader in e-commerce business. According to Casey and Carrol (2004), “From its inception in 1995 Amazon.com has consistently offered competitive prices to its customers, which is a critical element of its business strategy. However, the company’s business model expanded from selling books to Bezos telling us his current vision is offer “...Earth’s largest selection and be Earths most customer centric company; to build a place where people can come to find and discover anything they might want to buy online (p.9).” Where Amazon has filed losses more than thrice in late 1990s and early 2000s, it is also the first e-commerce based business which has managed to show off-season profits. Despite the fact that Amazon had cash flow problems which made it incur debts, close some of its customer services centres and warehouses along with laying off 1300 employees, it has never turned its back on taking risks and exploiting the opportunity in hand. Development of single store model which has an inherent list of cannibalization proves that Amazon trusts its strategic planning and leadership. Further critical analysis would reveal that it is Amazon’s strategic positioning in internet business which has allowed it to offer something that its competitors cannot provide. Most of the competitions emerged in response to Amazon’s first mover strategy were short-lived. On the other hand, leadership of Amazon focused on patenting its technological interventions which provided it an edge over other competitors willing to copy its strategy. As Casey and Carrol wrote, “Amazon.com has patented one-click ordering, an SCA that cannot be easily copied or duplicated as Amazon.com holds the patent. Amazon.com’s innovation to automatically suggest other items based upon previous purchases has become valuable both to customers and the company. Amazon.com also owns a patent on the associates program, allowing consumers to have access to online stores from which it draws royalties (2004, 11). In a nutshell, Amazon’s strategic positioning and development, is an outcome of its leadership philosophy. 5) Amazon’s Competitive Positioning Internet-based businesses are highly risky in nature due to ability of customer to switch from one supplier to another just by one-click. Current competitive environment for Amazon includes offline retailers with established brands and also online multifaceted and single-dimensional e-commerce businesses. Amazon has developed its business model on the basis of technological advancements and constant innovation. Due to these elements, it has managed to develop a competitive edge over present rivals. Since it is a pioneer in e-commerce business, therefore, the specialized knowledge borne by it acts as its major strength. Amazon has managed to learn, analyze current market scenario and transform accordingly. Due to this, Amazon has devised a business model which shows constant transformation. Its strategic alliances allow it to have better access to supplier base which is difficult to obtain for new entrants and even for present established rivals. Its extensive business allows it to have maximum economies of scale which reduces its overall operating cost and makes it share this cost with merchants available on its web portal. Due to presence of an efficient logistics system globally, it has managed to reach customers in distant parts of the world. Access to such logistics requires time and investment and Amazon invested very well in these two areas. Another competitive edge of Amazon is its ordering system. In a single interface, thousands of commodities with efficient filters including suppliers, prices, product specification etc, provides a wide range of variety to its customer. Such rich experience is difficult to obtain since it involves performing extensive research and development and vendor management. Another competitive edge includes lower prices offered as compared to real-time retailers. Absence of extensive physical facility made it incur low storage costs which is then, reflected in the prices offered by it. Innovation in its business models act as its major strength. Development of products like Kindle which is e-reading device allows it to have an edge over other competitors like eBay (Magee, 2011). With its venture into hardware and apparel industry, Amazon is not only having an advantage over its virtual competitors but also the physical rivals such as Wal-Mart or Gaps etc. In the end Amazon has effectively managed to take risks and face challenges that were difficult for its rivals to undertake. References Brohan, M. 2011. A flurry of patents suits hits Amazon, Viewed 12 November 2012 Buncombe, A. 2011. ‘E-commerce boom tempts Amazon to test Indian market’. Viewed 12 November 2012 Casey R. & Carroll, W. 2004, ‘The impact of e-commerce industry turmoil on Amazon.com: a strategic perspective’, Viewed 12 November 2012 Cohan, P. 2010, ‘Hot IPO: Dangdang, the Amazon of China, Soars 86.9% in Debut’. Viewed 12 November 2012 Magee, D. 2011. ‘Amazon: The most competitive business ever built?’. Viewed 12 November 2012 McMillan, G. 2011. ‘Amazon accused of extortion, patent infringement and more in new lawsuit’, Viewed 12 November 2012 Mintzberg, H. and Lampel, J. 1999, Reflecting on the strategy process, Sloan Management Review. Mintzberg, H. 1987, ‘Five Ps for Strategy ‘, California Management Review. Weston, J.F. and Brigham, E.F. 1974. ‘The Pure Play Method’. Essentials of managerial finance. Dryden Press: 623–624. Read More