Resource-Based Approach to Strategy Analysis - Case Study Example

Analysis of Amazon’s resource-based approach to strategy By Foundation Business [Department]30 November 2014 Analysis of Amazon’s resource-based approach to strategy Introduction A business strategy involves matching its internal capabilities to its external environment. The internal capabilities include the skills and resources within the business while the external environment comprises of risks and opportunities presented from outside the business. Recently, there has been debates about the business strategy, and one of the rising topic has been on the role of the business’s resources on its strategic position. This has led to an increase of interest in the field, and the term ‘resource-based view of an organization’ has been developed. A resource-based approach to strategy comprises of several elements: Competition Profitability- including an analysis of limitations by the competitors Relationships between resources Measure of returns to innovations Resource accumulation and how it enables sustenance of competitive advantage Role of information in increasing a business competitiveness Using the resource-based approach, the process of formulating a business strategy comprises of five stages: Analysis of the amount of the available resources in a business Evaluation of the capabilities of a business Analysis of firm’s potential to make a profit from its resources and capabilities Selection of a strategy Identifying the resource gap and developing the resources and capabilities of the business. The paper will discuss the stages of formulating an organization strategy using a resource-based approach as applied by Amazon in its 20-year growth period. Amazon is an American e-commerce company that has been in operation since 1994. The company began by selling books online before expanding its retailer options which has since made it one of the largest electronic market in the world today. Its founder, Jeff Bezos has over time employed some of the boldest approaches of business management, and one of them has been the resource-based approach to strategy formulation. The discussion will, therefore, refer to Amazon as the paper expounds more on the stages of formulating a strategy as outlined earlier. Resources and capabilities as the basis of a business strategy Resources are the basic units (inputs) of the production process while capability refers to the capacity of the resources to perform tasks in an organisation. Both resources and capacities serve two main functions in a company’s long-term strategy. They provide the strategy’s direction and also act as the primary source of the company’s profit. As the source of direction, resources and capabilities help to define the identity and purpose of the company. The resources in a firm also form a basis of ensuring the company observes corporate profitability. This, however, depends on two main factors: an industry’s attractiveness and the firm’s competitive advantage. The competitive advantage of an organisation is dependent on its resource position in the market. For example, a firm that utilises superior technology, obtains its raw materials at a lower cost or has access to cheaper labour will certainly be more competitive in its cost of production and ultimately in its product prices. In the case of Amazon, the firm started very slowly and had very few resources at the start. The founder, Jeff Bezos, only started off with a website that was quite an unpopular idea during the era of the internet infancy. With every sale through the site, he added more resources, and this led to the growth and ultimately the attractiveness of the business to even more people. Today, Amazon utilises some of the world best e-commerce systems which means it has superior technology comparing with other e-commerce sites in the world. Amazon employs a huge number of workers due to the expansion and increased business that has characterised the world of e-commerce. Financially, Amazon has is worth a stock market price of $154 billion and collected total revenues worth $74.5 billion last year (The Economist 2014). There are six major types of resources: physical, financial, technological, human, and organisational and reputational resources. When identifying and appraising capabilities in a company, it is important to maintain objectivity. Companies should not be carried away by their current state of dominance and success. Instead, the company should ensure that a slight indication of competition is noted and acted upon. One of the most important task is ensuring that the firm is aware of their capacities as compared to those of competitors. Creating an organised team of capabilities involve a complex process of coordinating people and the resources in a firm. The process of perfecting the coordination requires time and repetition in order for it to yield fruits. Evaluating the potential of resources and capabilities to generate rent The ability of resources and capabilities to generate returns in a firm depends on two major factors: the ability of the firm’s resources and capabilities to sustain a competitive advantage; the ability of a company to manage the returns made from these resources and capabilities. It is worth to note that competitive advantage is unsustainable in the long-term since the advantaged resources in a firm are easily eroded through imitation by competitors. However, there are four key characteristics of resources and capabilities that determine the level of sustainability of a firm’s competitive availability: transparency, durability, replicability and transferability (Grant 1991). Transparency- the ability of a company to sustain its competitive advantage in the long term depends on ability to withhold important information thereby lowering the speed at which its competitors can imitate its strategy. One of Amazon’s core factor to its success is its culture of withholding business information and secrets thereby rendering its competitors clueless on most of its operations. Durability- apart from competition, a firm’s competitive ability depends on the length of time it takes for the firm’s resources and capabilities to depreciate or get outdated. With the increasing pace at which technological advancements are taking place, the average longevity of resources has sharply declined. Transferability- as earlier explained, the competitive advantage of a firm depends on its ability to reduce the risk caused by imitation of its strategies by its competitors. This, therefore, means that if a company establishes a superior performance against its rivals, then it becomes difficult for its strategies to be imitated. Once the rivals get access to the similar or close resources as the company, the company’s advantage comes to an end. However, most capabilities and resources are not easily transferable between companies. This is due to several reasons: Imperfect information- most firms find it difficult to assess the value of their resources especially that of human resource and the potential of individual resources. It, therefore, makes logic that the firm which is able to build up this kind of information attains a competitive advantage over its rivals. This results to imperfection in the demands of the resources in a market since the rivals do not use the same resources. This leads to a rise or reduction in prices of the resources which ultimately creates the differences in profitability between various companies. Geographical immobility- it is difficult and expensive to relocate highly specialised workforce or large capital equipment in a firm. Therefore, the established firms which already have accomplished most of the relocation required, certainly have a competitive advantage over the rest. Amazon has managed to work on this area and has about 96 warehouses spread over its high business traffic areas. The warehouses ensure that most of the shipped goods by the company and other suppliers can be accessed easily and efficiently at their destination. This helps to solve the shipping and other related problems posed to most online businesses and transactions. This has seen Amazon make an achievement of making timely deliveries especially within North America, with up to 23% of the transactions closing within a day (The Economist 2014). Firm-specific resources- some resources such as reputation or brand are specific to a company and, therefore, it would be near-impossible to transfer them from one firm to the other. For example, if a brand name changes its ownership, the value of that brand may be eroded. On the same line, employees’ productivity may also decline if they are transferred from one firm to another. A depreciation seen during a change of ownership is an evidence that some resources are almost specific to a firm. With Amazon, they have created firm-specific resources such as the recently launched Fire phone which is one of its kind regarding to its features and price competitiveness. Others include Amazon Kindle and an e-commerce software known as Mercent, which has shown great hope in making Amazon’s and other online transactions more reliable and trustworthy (The Economist 2014). Immobility of capabilities- capabilities require more interactive resources and are thus difficult to relocate since that would mean a transfer of the whole team. However, this happens in certain arrangements such as in mergers and acquisitions. However, even then, the nature of the firm’s routine becomes disrupted causing poor coordination in the new environment. Replicability- the ability of a rival to imitate the strategy by another firm can greatly be limited by the imperfect transferability of resources or capabilities. One of the aspects that is difficult to replicate in a firm is the availability of highly complex routines. Also, the dynamics of stock-flow relationships offer a competitive advantage as well especially for new entrant firms. Another concern for the resources and capabilities is the firm’s ability to appropriate its returns. It involves allocation of rents where there are no clearly defined property rights. This includes the intangible assets such as copyrights, trade secrets, patents and brand names which lack clear definition, but are important in the firm. Another major intangible asset is the employee skills but on this, it is difficult to depend on it due to two main problems: there is a limited control offered by employment contracts over the employee services provided; there lacks a clear difference between a firm’s technology and the human capital of employees. Employee mobility also shows how risky it is for a firm to depend fully on the skills of certain key employees. Formulating a strategy To this point, the discussion has found out that the most important resources and capabilities are difficult to identify and understand, durable and should be imperfectly transferable. The firm should also possess distinct control and ownership over those resources while they should not be easily replicated. Formulating a good strategy, therefore, involves making use of these resources and capabilities. In some cases, the company may be forced to limit its scope on strategy on activities where the firm’s main competitive advantage lies. The firm’s strategic planning process should have a given time frame in which should be supported by the resources and capabilities for a sustainable competitive advantage. During strategy designation, the company should not shy from making bold moves such as abandoning resources that lack durability or are easy to replicate or transfer. If that becomes difficult, the company should create short-term strategies or invest in adopting new resources altogether. In cases where the firm’s competitive advantage is based on differentiation, and where its innovations are easily imitated, the company should ensure that it exploits its advantages before competitors join in the competition. The company should, therefore, be concerned with creating a quick response that allows them to create new advantages at a rate faster than their competition. In joint ventures, transferability and replication are allowed in strategy formulation and management. This is to allow allocation of benefits from the venture. For Amazon, the strategy began by creating cheap and easily purchasable goods through the website. Books were a good way of creating a customer base and who in return provided a record of reviews on site. This propelled Amazon to more referrals and repeated businesses since it was self-advertising. The expansion to other goods was a good sign of progression in a strategy to fill any emerging gap. Looking at the development that Amazon has experienced since its inception, it is easy to recognise that the company has utilised this strategy in its perfection. The company has continuously adopted the latest technology in its operations and also provided quality goods at very competitive prices (The Economist 2014) . Identification of resource gaps A resource-based approach is concerned with developing a resource base in the same measure as it focusses on their deployment. This includes the replacement investments that help to maintain the resource stock in a firm in order to extend the competitive edge of the firm and ultimately broaden the firm’s strategy. All these activities are meant to fill gaps. For an organisation to sustain its competitive advantage especially at a time when the consumer needs are constantly changing, it requires to develop its resource base. Firms should strive to specialise in their activities which makes them less transferable and replicated. A company should also remain committed to improving its resources and capabilities that sets the foundation for future competitive advantage. It should also understand that capabilities are learnt and perfected through repetition and thus strive to pursue a particular strategy (Grant 1991). Development of capabilities can be used as a foundation to broaden the range of products produced by a firm. This has successfully been used as a strategy of diversification in a company. If the company is to exploit the existing stock of resources in a firm and consequently develop the firm’s competitive advantage for the future, a firm may require acquisition of external complementary resources. At Amazon, the company expects its first clients who are considered the digital natives, to be entering into their prime shopping years now (The Economist 2014). The company should formulate a way of capturing this market segment by researching on their needs and demands since this is the group of shoppers who have the most confidence in the company’s transactions. The company, therefore, is active to ensure it places the necessary infrastructure that will enable it to serve this segment more efficiently and satisfactorily. The company should also consider investing more into one of the most active goods in the consumer expenditures in America- the consumables. Research indicates that nearly half of the expenditure by American consumers buying through the internet is spent on fast goods such as food and toiletries. If Amazon considers engaging this market more, then the business would most probably be filling a gap that is yet to attract the enough recognition. The company has also shown an interest to tie more of its customers by requesting more loyalty through their subscriber-based loyalty program. Amazon, on return, offers the loyal subscribers free shipping for any goods bought by the subscriber within that year. The program costs $99 in America and $79 in Britain. It is a good bargain for the clients who engage in a lot of business on the site and to Amazon, statistics show that the subscribers spend about four times more than the non-subscriber. This makes a good strategy by Amazon to increase business on the site. More plans have been in progress at Amazon to try to make the website an all-round business site. For example, earlier this year, April, Amazon introduced a streaming site that is exclusive to the Prime subscribers. All these in a quest to attract more numbers of loyal customers to the site. Some of the strategic actions adopted through the program is a show for kids which tactically targets the women who make the larger percentage of loyal customers. In addition, the subscribers can borrow a book for a month which enables the customers to enjoy cheaper services and reading materials. However, Amazon’s technological devices have not made the best business, and this has seen the company fail to break into the market that has been dominated by Samsung and Apple. It is, therefore, an area worth investment by Amazon although the newly launched Fire phone has yet to receive enough reviews for statistics purposes (The Economist 2014). Criticism of resource-based approach to strategies formulation One of the strengths of using resource-based approach to strategy making is that the approach is largely dictated by a company’s unique resources and capabilities. This enables providing only the best opportunities for the assets available in the firm. The firm’s performance is, therefore, controlled by its unique resources and not necessarily the structural characteristics of its industry. The approach, if well utilised, allows for reduced cases of imitation and replicability by competitors in the industry. The competitive edge of the company is also dependent on the source of its raw materials and that means cheaper sources can mean cheaper products to dominate the industry. On the contrary, the approach is seen as lacking an integrating framework for all its contributing elements. There has also been minimal research into the field although recently, the approach has been adopted by numerous industries which provides it with a platform to develop. The lack of ample research means that the necessary information to be adopted by companies and other organisations is not available for use. Conclusion By adopting the resource-based approach to strategy formulation, companies such as Amazon make their resources and capabilities their central considerations. These are the primary elements in which a firm establishes its framework and strategy identity. Resource-based approach also strives to create an understanding of the relationships created between capabilities, competitive advantage, resources and profitability. The approach majorly emphasises on a company’s ability to sustain its competitive advantage over its competitors in the industry and market (Grant 1991). The designation of the resulting strategy should, therefore, exploit the unique characteristics of any business to reduce cases of imitation by the competitors. Bibliography Grant, R. M. 1991. The resource-based theory of competitive advantage: implications for strategy formulation. Knowledge and Strategy. Viewed 30 Nov, 2014, < http://www.skynet.ie/~karen/Articles/Grant1_NB.pdf > The Economist. 2014. At 20 Amazon is bulking up. It is not—yet—slowing down. Viewed 30 Nov, 2014, < http://www.economist.com/node/21604559/print> Read More