Strategic Financial Management - Case Study Example

Table of Contents 1.0 Introduction 1.1 The Market in Which Amazon is in 1.2 How Amazon makes it money 2.0Financial Analysis of Amazon 2.1 Profitability Analysis 2.1 Liquidity Analysis 2.3 Solvency Analysis 3.0 Marketing Analysis 3.1The Price 3.2 The Product 3.3 The Place 3.4 Promotion 4.0Human Resource Analysis with Conclusions 5.0 Operation Analysis with Conclusion 6.0 Amazon and the SWOT Analysis 6.1Amazon and the PESTLE Framework 6.2 Amazon and the Five Forces model 6.3 Amazon and the Resource Capabilities –The Value Chain 7.0 Repositioning Amazon 8.0 Strategic direction 9.0 Conclusion and recommendation 1.0Introduction Today, business environment has increasingly become more turbulent, chaotic and challenging than ever before. To survive, it is vital that a firm can do something better than its competitors (Wonglimpiyarat 2004:1). Globalisation has not only altered the nature and the intensity of competition but has had to dictate and shape organisations in terms of what consumers wants, how and when they want it and what they are prepared to pay for it (Hagan 1996:1). Kanter (1995:71) on his work of “Mastering Change” argues that success in the present day business is not for those companies that re-engineer the way they do things, or for those fixing the past. According to Kanter (1995) such an action will not constitute an adequate response. This is so because success is based on an organisation’s ability to create, rather than predict the future by developing those products that will literally transform the way the world thinks and view it self and the needs (Kanter 1995:71). This paper is aimed at analyzing the case study of Amazon.com. In an attempt to implement a strategic and management turn around strategies by the CEO Jeff Bezos. The objectives of this paper can be examined from three dimensions. In the first instance, the paper seeks to outline, analyse and discuss the main issues concerning the case study Amazon.com. The first part of the paper provides the background while looking into the market in which the company is operating. The section also highlights the profitability and liquidity position of the company. Part two of the paper looks at the marketing strategies of the company by utilising the four Ps. The section further looks at the Human resource management strategies, operations analysis, the SWOT, PESTLE with respect to the case Amazon.com. The last part of the paper provides the conclusion and recommendation through the development of the strategic direction for the company. 1.1The Market in Which Amazon is in Amazon .com worldly known as Amazon is a key and strategic player in the field of electronic commerce. Being a worldwide brand selling virtually everything through its online shopping experience with customers. Today, Amazon serves customers in more than 200 countries through its several retail websites. Its e-commerce business model has become a benchmarking platform for other businesses to develop their e-business. Through its online shopping access webpage customers can shop virtually everything from financial services to diamond rings. Thus, to sum up, while operating as an online and e commerce supermarket, Amazon was in the business of virtually everything. Selling, books, videos, electronics, third party sellers, jewelry and watches, musical instruments etc. Amazon has become a house hold name and a global brand. No wonder, Amazon was seen as a gold standard for customer’s online shopping satisfaction. 1.2How Amazon makes it money Amazon is a global player and a strategic player in the e-commerce and electronic business market. Through its hundred of warehouses worth million of feet it link up suppliers, producers through the warehouses and now sell to customers through its various search engines and online shopping sites. Amazon makes money by adding a profit margin to the cost of the items before selling to the customers. Through agreement and networking with suppliers they cut down cost through just in time production and supply technologies. “What began as a goal to become the world's biggest and best online bookstore developed into a store where customers could buy' anything with a capital A”. Thus, Amazon makes it money from e-business industry can be attributed to its vast experience in the market, product differentiation, assorted brands and cost leadership. It is a market for anything with unbeatable prices. 2.0Financial Analysis of Amazon Here, using relevant financial ratios and operational ratios, I will assess the financial health of Amazon during the period of the case. It is from our result that we will be able to make pertinent decision as to a hold, a buy or sell decisions to prospective investors. 2.1 PROFITABILITY RATIO Ratio Formula1 2005 2004 2003 2002 Profit margin Return on Capital Employed Return on Equity Return on Investment From the period 2002 through 2005, the profitability of Amazon increased from though the accumulated amount of loss affected retained earnings that resulted to a negative owners equity. The profitability ratios show that the company is doing well and there have been improvements from 2002 in almost all the ratios. Compared with the ratios for the other 3 years we see that 2005 was better than the other three years. 2.2 Liquidity Ratio Ratio Formula2 2005 2004 2003 2002 Current Ratio 2929 =0.98 1929 1826 =1.46 1252 1616 =1.52 1066 Quick Ratio Cash Ratio The company is highly liquid. In all the four years the company’s current assets could cover more than 98% of its current liabilities. In the absence of inventory, the company’s current assets could cover more than 100% of its current liabilities in all the years. The same argument holds mutatis mutandis for acid test ratio. Ratio Formula3 2005 2004 2003 2002 Debt to total Assets Debt to Equity Long-term debt ratio 2.3 SOLVENCY RATIO The company is highly geared thus indicating a watch out for bankruptcy. From above, it can be observed that the company uses more debt than equity in financing its activities. This is evidenced by the debt-t-equity ratio of 14.4:1. There is therefore a great effect that it might not be able to meet up with its obligation. That is, the risk that the firm might not meet its long-term debt obligations. 3.0 Marketing Analysis According Kortler (2005), the marketing communication mix or promotional mix involves specific mix of advertising, personal selling, sales promotion and public relations a company uses to achieve it advertising and marketing objectives. The five major types of promotion are: 1.2.1 Public Relation This is a tactical method used by Amazon promote positive image about its activities through sporting events, public gatherings to head-off unfavorable rumours stories and events or create a favourable one. That is it is a way through which Amazon company’s management build goodwill for the company through favourable publicity, stories and events. This can be through the radio or television (Varey. 2001). 1.2.2 Sales Promotion As a marketing tool, is often being referred to as bait used by companies or marketers to push sales. That is it is a short term incentive used by a business, individual or governmental authorities to provoke an action. Examples include premium sales, sales discount and product display (Kortler.P, 2002). With Amazon, the prices are the cheapest in the market, and based on its current marketing strategy, once a customer see cheaper prices elsewhere, their prices are automatically adjusted. 1.2.3 Advertising Advertising is often seen as any paid form of non-personal presentation and promotion of ideas, goods, or services by an identified sponsor. This sponsor can either be an individual, business or the government. A company total promotional mix will be incomplete should advertisement be left out. Prints, broadcast are good examples (Kortler.P, 2002).Advertising also tends to be very expressive as it allows the company to dramatize its products through the use of visuals, colours and sound. Amazon does this through the various search engines. It web pages are hooked up to different search engines. 1.2.4 Personal Selling Personal selling is marketing communication tool where by, a presentation is carried out by individuals or corporate bodies to create contacts, boost sales and build relationships with major stakeholders (customers). Examples include sales presentations, and trade shows. Amazon marketing strategy in this direction is its networking and partnership with different search engines, through which customers are informed through the presentation of all the other items in which Amazon have on offer. 1.2.5Direct Marketing This is often used in situations needing immediate response. Examples include catalogues, telemarketing, fax transmissions and the internet. Thanks to technological breakthrough marketers can now communicate and pass over messages through traditional media, fax machines and mobile phones, pagers and computers. These are however confused and impotent in their profusion and inconsistency (Varey 2001). None of the above marketing communication is independent as the five are interrelated and supplement each other. However, direct marketing is often done with the Thank you message that often accompany’s product delivery goes with catalogues of some other products offerings. Marketing communications has mix elements of the mixes as they are blended in different quantities in a campaign (Rowley (2004). Mmarketing communications mix includes different elements, not limited to the following list. An examination will show there is some cross over between individual elements (e.g. Is donating computers to schools, by asking shoppers to collect vouchers, public relations or sales promotion?) Here are the key of the marketing communications mix Schultz D. E., and Schultz H F., 1998). Using the four Ps, Amazon wanted to become the world’s most customer-centric company. From the case study, despite the progressive change in its vision, Bezos's answer in 2003 about the main difference between conventional retail and his business has remained relevant throughout Amazon s history. Thus, Amazon marketing strategy is that of cost leadership and product differentiation with longer commitment core commitments such as the emphasis on longer-term market leadership. For the greatest communication impact, Kotler (2002) argued that the entire marketing mix (promotion, product, price, and place) must be carefully coordinated for greatest success. This is so because, the product designs, the price, the shape and colour of its package and others within the chain communicate something to buyers. Thus, for consistency and uniformity all these aspects of marketing should be integrated. Amazon has build this on selection, price and convenience. 4.0Human Resource Analysis with Conclusions The term human resource management is not new. It has been widely used by scholars and managers to refer to the set of policies designed to maximize organizational integration, employee commitment, flexibility and quality of work (Poole 1999). Jackson & Shuler (2002) referred to it as an umbrella term that encompasses (a).specific human resources practices such as recruitment, selection and appraisal and (b). formal human resource policies which directs and partially constrain the development of specific practices and in all, it comprise a system that attracts develops, motivates and retains those employees who ensure the effective functioning and survival of the organization and its members (Jackson & Schuler 2002). Amazon operates using just in time production and supply techniques. It key employees are mostly those working in the world houses, packaging customers purchases, and internet and information technology experts. The company spends more in selecting the best IT workers compensating them and motivating them, since technology is at the forefront of it activities. No wonder, today Amazon e-business platform is a model for other businesses. 5.0 Operation Analysis with Conclusion Amazon operations centre around distribution and warehousing. Once a customer places an order or a purchase this is automatically approved at the sales department that passes the transaction to the warehousing department for packaging and dispatch. These departments are connected through an electronic data interchange linked to various suppliers and producers. The company operates as a world wide market place where buyers can find virtually everything they are looking for. This has been facilitated through its online shopping facilities and search engines. 6.0 Amazon and the SWOT Analysis Strengths Better Value, in the form of lower prices. Fresher merchandise and wider assortments. Superior Locations access from worldwide Better physical appearance of the stores themselves. Good will, exclusive rights with some of their suppliers. Maximization of the four Ps of Marketing at all front. High capital and a pool of reserves, The Employees, more than 30different web sites around the world. cheaper, better products and providing more choice Hundred of partners and suppliers in 200 countries. Best overall benefits package in the industry charitable giving and community-based education programmes owns more than 90% market share in some items Opportunities A pool of cheap credit facilities The US is an open economy welcoming all sorts of businesses. Is still the land of opportunity? China is a big trading partner of the US, an alternative and better source of cheaper items. The impact of Wall-Mart and other market followers has not been felt in all the states Many small groceries stores are closing down. The growing pool of technology. The heavy investment on Research and Development (R&D) by the US government Fall of the US Dollars, will mean cheaper operational cost within the US. Threats Anti Grocery stores campaign Loyalty of some consumers to old established merchant and grocery stores. The likelihood of terror attack of some TSCO locations in the US. Natural disaster such as the hurricanes, tornadoes, tsunamis, are now on the rise Exclusive rights enjoyed by Wal-Mart with some of its suppliers Difficulties finding their own suppliers, or owning their own farms. Current market leader, Wal-Mart had $245 billion in revenue last y Weaknesses Some dissatisfied customers Sole right to some products by competitors Key Niche players Many law suits against the company The lack and absence of unique product with total differentiation from those of competitors. The lack of ownership of exclusive patents. Dropped and sold of many products that have not delivered reasonable profit. 6.1Amazon and the PESTLE Framework Johnson et al (2006) states that the PESTEL framework is a framework that can be used to categorise the factors that influence the business environment of an organisation into six main types including: Political Influences, Economic influences, Technological influences, Social Influences, Environmental influences, and Legal influences. Figure 1 below presents a layout of the PESTEL framework according to Johnson et al (2006). The PESTEL framework can only be used to look at the future impact of environmental factors and that this impact might be different from the past. Thus an understanding of how the factors in the above framework may drive change is only a starting point (Johnson et al 2007).There is a need for an understanding of the key change drivers and this will be explained in section 4 below Looking at the PESTEL framework shown above one can observe that the Amazon is affected by all the environmental factors in the framework. Under political factors, Amazon Plc is affected by both taxation and social welfare policies. Given the fact that consumer’s income is dependent on government taxation policies, it is evident that take home income might either increase or reduce depending on the taxation policies adopted by the government at anyone time. In addition, government spending is greatly affected by its taxation policy. What is the future budget situation of the US? And most of the other countries were Amazon customers are based. Is the government striving at a surplus, deficit, or balance? The political situation of the world is currently unstable; with the major government loosing popularity because of the war in Iraq, the tit for tat with Iran, the war on terror. This is because current faith of world politics depends on the US and the United Kingdom (UK) with the two countries likely to be targets of terrorism attack. Social welfare policies will likely affect Amazon Plc all area of its business (Food and non-food items) in the US in that increased social welfare to the public will mean a corresponding increase/decrease on the demand of those items required by the states from Amazon and other Groceries. Under environmental factors I consider waste disposal, energy consumption and environmental protection laws the world over to have a great impact on Amazon. Under the legal factors I identify employment law, health and safety and product safety laws as having potential impacts on the Amazon. This is so because, Amazon product must be certified, and must abide at anyone time to all these laws. This should not be neglected at any onetime. For example, environmental friendly policies must be in scripted on the packaging for all online purchases. All the economic factors can be regarded to have an impact on the Amazon. For example, high unemployment rate, high inflation rates, low GNP trends and slumps in the business cycle will imply low disposable income, more dependence by the citizens on credit facilities, borrowed funds and thus alternative sources of finance. The US dollars and other major currencies the world over are currently falling at an increasing rate, this will mean an increase in the currency exposure. Transaction and translation cost will be high in the US, value of credit facilities if granted in US dollars will fall. The value of Amazon assets in the US will fall when doing reporting in the parent company currency, the British pounds. What is the income distribution? What are the shopping habits, what is it that other online stores offer that, Amazon doesn’t offer? Social factors and Technological factors are not left out. Amazon Plc will be affected by almost all the social and technological factors. Being an electronic business it has to be at the forefront of new product development Under the social factors for example, population demographics have a great impact on the future of it activities in the US. Also given the fact the US is a highly technological country, this is highly going to affect its activities. Amazon has been at the forefront of technological development to facilitate it online business. To remain a market leader in this domain, it must adhere to its current strategies since competitors presently use it as a benchmark. 6.2 Amazon and the Five Forces model Porters Five Forces Approach Application to the E-Business industry Relationship with suppliers The suppliers constitute independent artist, cotton farmers, designers, customers. Bargaining power of buyers Low switching cost due to numerous options available to buyers. Threats of new entrants Low threats of new entrants because of the human, time, material and financial resources necessary to set up an online shopping centre. However, and entry of a new entrant from other continent like Asia remain a big threat. With individual designers and niche players increasing everyday. Threats of substitutes products or services The industry is characterized with many niche players. Rivalry amongst established firms Fierce competition with flat cost. No major player able to dominate the market. How ever with continuous innovation and design of new products, lower prices Amazon has taken over the lead. Physical world retailers, other online super stores and key niche players offering electronic services Figure:1 Porter (1985:4) contends that the Five Forces define the rules of competition in any industry and at the same time marks the bases for understanding a company’s success. Porter (1985) went further and argues that, competitive strategy must grow out of a sophisticated understanding of the rules of competition that determine an industry’s attractiveness. The researcher further claims that, “The ultimate aim of competitive strategy is to cope with and, ideally, to change those rules in the firm’s behaviour.” (1985: 4) and through their own strategy a firm can take hold of these five forces. From Amazon case Company’s report, one will not hesitate to link this to their present cost leadership strategy. At the most fundamental level, Porter (1985) contends that firms create competitive advantage by perceiving and discovering new and better ways to compete in an industry which is ultimately an act of innovation. In this regard Porter assumes that innovations shift competitive advantage when rivals either fail to perceive the new way of competing or are unwilling or unable to respond. This is the situation of Amazon in which the company has shifted in to a generic focus and cost leadership position through understanding of Porter’s five forces as is at the forefront of technological development coupled with innovation. Such a position is primary for the electronic business where customers and suppliers switching cost is low, with little profit margin. According to Porter (1985), once a company takes control of the five forces framework, the company becomes the pace setter. The researcher further and identify typical causes that shift competition to a company’s advantage: shifting input cost or availability, new technologies and shifting buyer’s needs. 6.3 Amazon and the Resource Capabilities –The Value Chain Amazon existing knowledge and information of customers can be critical in managing sales. Thus, in an event that the management of Amazon discovers that a competitor is laying emphasis on the BCG growth matrix, their strong brand name and corporate reputation can be extended to launch new products and quickly gain market share without threatening the credibility of the current business. That is cutting down on the number of dogs while using stars and cows to feed on question marks. Their existing network of suppliers and other stakeholders (Distribution network) can be used to increase sales of its existing products or reduced cost of a new product launch. Maximizing this bundle of distinctive capabilities, Amazon has the best chance to be a winner to counter competitor’s move. In addition, through an analysis of Amazon value chain process we also recommend the organisations management, to cut on non value adding items within the chain. Through an analysis of Amazon value chain, it can be noted that at the level of the secondary activities, Amazon lean manufacturing technology, internet marketing technology, production technology, the just in time production line, customer relationship management (CRM) represents a big source of Amazon competitive advantage. This is because it will cost time and money for a competitor to replicate this. At the level of the primary activities, the relationship existing between Amazon and its suppliers is a strategic and competitive advantage. They own most of the suppliers thus given room for just in time production manufacturing method, Total quality management etc. they have cost advantage, exhibited in the form of lower prices. Thus a key advantage is source through the inbound and outbound logistics accelerated by the marketing information technology. 7.0 Repositioning /Strategic Direction-Amazon Strategic advantages are not always achieved by competition alone. Collaboration between potential buyers and sellers and some other dealers turn to be very beneficial and advantageous when negotiation and contracting costs reduces (Johnson et al. 2005:261). I believe by developing and capitalizing on its service minded employees and reliable service, the company stands a better chance to sail through the five forces framework (Johnson & Scholes 2007). Here, if Amazon realizes that a competitor is operating following the BCG growth matrix, the company should capitalize on it core values. These values are defined with regard to quality, time and cost tied down to innovation. The higher the accessibility to technology and cost leadership the higher will be the customer base and thus the competitive advantage of the firm. Effective communication plays an important role in that it explains the product as well as it positions the company and the product (Storey and Easing wood 1998: p. 344-). Staff/customer interaction is a measure of service quality as opposed to product quality. This will mean assessing the quality of the service products as customers also tend to evaluate how the service was delivered by the staff. Customers look in particular at the welcoming nature of the staff, their physical appearance or outlook, consciousness, promptness and efficiency. Attention could be shifted to these taken for granted assumptions. Amazon should cut down on the number of question marks. These could be easily turned in to stars and cash cows with excesses from cash cows. For any business, customers are the main strengths and means of success. Amazon has gained advantage from this fact. Thus, it can be stated that the SWOT is surely compatible with its success factors. This could also be capitalized upon. Amazon as a company should use clear values to underpin what they do. Their core purpose is based on customers’ value creation. In all, cost-leadership has become part of the organization’s culture through symbols and effective processes being respected. Our caution to Amazon’s management is that, such a strategy will only work effectively in situation where the organization can provide products or services at a lower cost than competitors. It is not a try and error exercise. It is a commitment and a culture. In all, we recommend Amazon to see such an action from the marketing concept which lay on the premise that, achieving organizational goals depend on determining the needs and wants of the market target and delivering the desired satisfaction more effectively than competitors (Kortler 2002). 8.0Conclusion and recommendation From the findings, one will not hesitate to conclude that Amazon success in e-business can be attributed to its vast experience in the market, product differentiation, assorted brands and cost leadership. It business concept of “keeping price low below that oc competing firms is a golden rule”. This has become part of the company’s culture. According to Johnson & Scholes (2007), organisational culture is a tool in management strategic armory which appears to be invisible yet it influences “why” “how” “what” and “when” things are done in an organisation or “it is the way things are being done here” (Johnson & Scholes 2007:66). In all, Porters generic strategy and the core competences help explain Amazons’s success as compared to its competitors. These methods of analysis are useful but do not provide the complete story. Furthermore, neither approach can predict short or long term success However; these methods should be complimented through information collected from questionnaires and interviews. Thus there is a growing need for this study to be replicated using other data collection methods. References Kanter, R. M. 1995. “Mastering Change.” Pp. 71-83 in Learning Organizations: Developing Cultures for Tomorrow’s Workplace, edited by Chawla and Renesch.Portland, OR: Productivity Press Hagan, M. C., (1996).The core competence organisation. Implication for Human Resource Practices. Human Resource Management Review Vol.6, No 2. 1996, Pp. 147-164 Wonglimpiyarat, J. (2004). Amex’s strategies for launching the smart card innovation. Technovation 24 (2004) 773–777 Kitchen, P. (1993) 'Marketing communications renaissance', International Journal of Advertising, 12: 367-86. Kortler, P. A framework of Marketing Management. 2nd ed. Published by Pearson education, Inc. 2002 Kortler, P. (1996) Principles of Marketing, 2nd European edn, London: Prentice-Hall, case study no. 19. Mack T.; (2000).Electronic Marketing: What You Can Expect The Futurist, Vol. 34 Porter, M.E. (1985). Competitive advantage: Creating and sustaining superior performance. New York, NY: Free Press. Porter, M.E. (1990). Competitive advantage of nations. New York, NY: Free Press. Rowley J (2004) Just another channel? Marketing Communications in e-business, Marketing Intelligence and Planning, Vol 22, no 1 Schultz D E and Schultz H F (1998) Transitioning marketing communication into the twenty first century Journal of Marketing Communication, vol 4, 9-26 Schultz, D. E., Tannenbaum, S. I., and Lauterborn, R. F. (1993) Integrated Marketing Communications: Putting It Together and Making It Work, Lincolnwood, IL: NTC Business Storey C., Easing wood C.J. (1998). The Augmented Service Offering. A conceptualization Study of Its Impact on New Service Success. Journal of Product Innovation Management, vol. 15, pp 335-351. Jackson E.S., & Shuler S. R., (2002). Strategic Human Resource Management. Poole, M., (1999). Human Resource Management and Industrial organisation Critical perspective on business and management Read More