Primary Causes of Problems at Amazon.Com and their Remedies - Case Study Example

Running head: AMAZON.COM PAST, TODAY Amazon.com Past, Today and how They Got There Question 1 Who are Amazon's competitors Amazon's competitors are those enterprises that deal in selling products similar to those sold by Amazon.com. The competitors are deal mainly in music CDs, books, DVDs, and in the entertainment and retail industry such as software, games, electronics, furniture, apparel, toys, kitchen equipment, food, baby products, musical instruments, beauty products and other tools. The major companies that pose competition to Amazon.com are Barnes and Noble Inc, Columbia House Company, eBay Inc, Tesco, Blackwell, Borders, and Waterstones. Others are supermarkets and chain stores ("hoovers.com"). Question 2 Why would customers shop at Amazon if they can find better prices elsewhere Although customers can find products at better prices elsewhere, they shop at Amazon.com because they feel that they should make their purchases from a site that they can rely on such as amazon.com. Their feeling is aroused by the opinion that the price quoted for the products includes the price of purchase, the cost of doing a search, as well as the cost incurred in undertaking a disappointing purchase. Additionally, Amazon.com offers customers a number of incentives such free shipping of the purchased products and discounts on selected products. Amazon.com also offers free gifts on purchases made from products made by particular merchants ("Amazon.com"). These offers are only attractive but also save a customer the agony of searching fro goods from Amazon's competitors ("Amazon.com"). For instance, in the years 2002, the customers who spent $50 or more on clothing got a $30 gift for use anywhere on Amazon.com (Hayes 2002). Question 3 Why did Amazon create most of its own technology from scratch Amazon.com created most of its technology because the system had to be customized to meet the company's requirements. The strategy used was meant to suit user experience and thus put Amazon's competitors on the defensive. The technology would offer customers more opportunity to sample Amazon's products and therefore outwit the company's potential competitors (Kalakota & Robinson 2000).The idea was to avoid migration of customers to other companies once they got accustomed to Aamzon.com (Kalakota & Robinson 2000). Question 4 If Amazon buys products from other firms and simply ships them to customers, why does it need so many of its own distribution centers Amazon.com needs many distribution centers of its own because doing so enables it to make product deliveries to customers quickly and also helps the company to save on costs. In addition, the distribution centers were already in operation and therefore just had to be used by Amazon.com in the partnership deals with other companies ("Amazon.com"). Question 5 Will other retailers buy or lease the Web software and services from Amazon Can Amazon make enough money from selling these services Other retailers will buy or lease software services from Amazon.com because the company has immense infrastructure. Although Amazon.com has been making losses for many years due to the high initial costs and intensive promotion activities, it can still make enough money from selling the services it deals in. This evidenced by the fact that the company's financial position has improved somehow since the year 2000 (Post & Anderson, 2006). Customers' confidence in the company put it in a position to make profit. Question 6 Write a report to management that describes the primary cause of the problems, a detailed plan to solve them, and show how the plan solves the problems and describe any other benefits it will provide. Running Head: PRIMARY CAUSES OF PROBLEMS AT AMAZON.COM Primary Causes of Problems at Amazon.Com and their Remedies Abstract This report evaluates the problems faced by Amazon.com since its inception in 1994 and its current status. A detailed plan to solve the problems is given together with an account of how the plan would work. It is concluded that the problems faced by Amazon. com are based on its promotion and expansion activities. The report also highlights recommendations pertinent to the conclusion Primary Causes of Problems at Amazon.Com and their Remedies Amazon.com started its operations with pomp when it was formed in 1994, and widened its scope in 1999 when it partnered with other companies and stores such as Audible, Ashford.com, Greenlight.com, Nextcard.com, Kozmo.com, Pets.com, HomeGrocer.com, Della.com, drugstore.com, Gear.com stores, Ashford.com, Audible, Della.com, drugstore.com, Sothebys and Gear.com (Post & Anderson, 2006). Problems must have started with the subsequent collapse of some of the companies that had partnered with Amazon.com. By the year 2003, Amazon.com had launched a subsidiary to perform web sales and fulfill the company's technology to other firms (Post & Anderson, 2006). At the beginning of 2003, Amazon.com spent $200 million on information technology, which rocketed to $900 million by mid-2003 (Post & Anderson, 2006). The subsidiary's role was to help Amazon.com recover some of the costs incurred in the process. This could have marked the beginning of problems at Amazion.com. The trend deepened when by the year 2004 when 25 per cent of the sales made by the company could be attributed to its partners. Additionally, amazon.com got embroiled in litigations in 2004 when one of its partners, Toys 'R' Us, sued it over exclusivity rights (Post & Anderson, 2006). Amazon.com also invested massively in improvement of its infrastructure, thus spending colossal sums of money in the process. Moreover, the company's immense investment in promotion activities cost it a fortune. The company got involved in giving gifts to customers, special offers, discounts and other incentives that were aimed at improving sales (Post & Anderson, 2006). One major cost that the company currently incurs is shipping of items purchased by customers to their destinations. All these incentives are given to customers at the expense of the company's profit margin. Consequently, although amazon.com reported a $35 million profit in 2003, the reality was that the Company had actually lost $3 billion (Post & Anderson, 2006). The company also had a debt of 1.9 billion by the year 2003. Yet another $1 billion was recorded as net losses and could not be accounted for (Post & Anderson, 2006). Review of Amazon.com's operations and problems In the year 2000, Amazon.com on overhauled its entire system in order to give it a more customer-appealing look (Post & Anderson, 2006).The company spent $200 million on new systems such as software from Epiphany, logistics from Manugistics Company and a new database management system (DBMS) from Oracle (Post & Anderson, 2006). Furthermore, the company signed more contracts with companies such as SAS for data withdrawal and appraisal. All these services of course came with additional costs to the company. In spite of the additional costs, the biggest and perhaps most expensive deal was between Amazon.com and Excelon as a form of business-to business (B2B) integration (Post & Anderson, 2006). In the same year, Amazon.com linked with HP in a deal that would see the company offer information technology services to Amazon's customers. Despite, Amazon's desire to expand and dominate the online market, the company was criticized over its activities in 2000. For instance, that year the company conducted a price experiment by quoting different prices on DVDs to different customers (Talluri & Van Ryzin, 2005). However, customers who logged in to Amazon.com web site at different times discovered that different prices were being offered at different times (Talluri & Van Ryzin, 2005). Although Amazon.com later confirmed that it was offering random discounts of between 20 to 40 per cent, this never augured well with some of its customers (Talluri & Van Ryzin, 2005). Among the customers' sentiments were that they were being charged more when they shopped more and that the exercise (Amazon's promotion) was awfully sneaky and unscrupulous. Other customers referred to Amazon.com as a shyster (Talluri & Van Ryzin, 2005). One the major illusions of business enterprises as they grow is that because they have sophisticated business models, they can automatically apply them to adjacent markets and therefore block prospective competitors (Treacy, 2005). With the advanced technology and business operations that the company had acquired over time, Amazon.com had a similar assumption (Treacy, 2005). The company applied such a scheme when it announced that it was implementing its bookselling model in all retail markets. This move failed because retail markets have many varied characteristics and therefore not all of them can be linked to one business model (Treacy, 2005). Lack of clear integration policies brought Amazon.com into conflict with other companies that it dealt with. As a result, some of the companies that Amazon.com was linked to later collapsed. Furthermore, Amazon.com's tribulations were contributed in part by the litigation it was subjected to by one of its partners, Toys 'R' Us (Post & Anderson, 2006). Kalakota and Robinson (2000) have suggested that lack of integrated application architecture can cause a quick collapse of one or more of the business enterprises that are in partnership. With massive investment in information technology, Amazon.com faced problems that put the company in conflict with customers. For instance, using the merchant's link to Amazon's database servers, customers would purchase items that were displayed on the requested pages. However, no updates would be made about the purchase and subsequent customers would be informed that a particular item was in stock when it had actually been sold out (Post & Anderson, 2006). As such, customers would be undecided on whether to blame the company or the technology that the company used (Mills & Law, 2005). Over investment in promotion activities accounted in part for Amazon's record loss of $ 1.9 billion. The company offers a variety of services to customers in order to woo them and retain the current market base. However, this was done without assiduous consideration of the corollary of offering such services. For instance, the company offered great discounts to customers, supplied gifts to shoppers and even offered free shipping services to customers on shopping of advertised commodities. As such, the company shouldered a lot of burden that ultimately could have accounted for a large share of the $1.9 billion loss. The technology that Amazon.com created gave it the impression of a company star (Post & Anderson, 2006), at least to the perception of an outsider. Nevertheless, the reality is that the company committed itself to expansion programs and customer-satisfaction activities that wrecked its financial status. In spite of the hurdles faced by Amazon.com, the company's current status is a divergence from what it was between 1999 and 2003. From a company that faced litigations and accusations by competitors, Amazon.com is now perceived as a leading global brand in the online business industry. Moreover, the company's present success can be attributed to two basic terms: technology and fulfillment (Malecki and Moriset, 2008). Detailed plan to solve the problems Dealing with problems of integration with other companies The decision by Amazon.com to collaborate with other businesses in their activities may not have been properly implemented, thus the eventual collapse of some of the companies. According to Lientz and Rea (2001), e-business leaders such as the management of Amazon.com should be very attentive to potential conflicts and predicament between e-business and regular business. It is obvious that some of Amazon's partner companies were not e-business related. In fact, not all the current partners of Amazon.com are not e-businesses. Hence, ineffective strategies during partnership the period could have led to the companies' eventual collapse. An effective plan or strategy in implementing partnership deals such as that one by Amazon.com and other companies involves separation of the e-business strategy from the regular company. In such separation, companies can implement four strategies, according to Lientz and Rea (2001), as highlighted below. Sharing of warehousing facilities, the fulfillment and returns in business Support for customer service Sharing of marketing techniques and product management ideas Sharing of information technology resources, systems and other resources The last two points above are very significant for Amazon's case since one of its partner companies sued it over exclusivity rights- a conflict in marketing techniques and product management ideas. Additionally, in 2004 Amazon was relying on 25 per cent of sales made by other partners, which means that the company itself was exhibiting a somewhat lackluster performance. Dealing with illusions on growth- effect of competition As earlier mentioned, as companies grow they develop an illusion that any service or product they provide to the market will always hit the market with a bang. However, that was not the case with Amazon. Its field is now littered with competitors such as Barnes and Noble Inc, Columbia House Company, eBay Inc, Tesco, Blackwell, Borders, and Waterstones. Some leading supermarkets and chain stores have also ventured in operations similar to those of Amazon.com. What Amazon.com did is to overlook the aspect of competition on the assumption that technology per se would put the company in a better position. Yet technology in itself is a mere enabler of efficiency, not a competitive advantage (Tsai, 2003). O'Brien & Maracas (2008) further noted that the people (customers) and the prevailing environment have more impact on the adoption of new business initiatives than technology does. With respect to the above argument, Amazon.com must understand the following aspects of e-business: The desire for enterprise information access To a company, information is power, but this only true if the power is exercised at the right place and at the right time (Tsai, 2003). Amazon.com provided information to its customers but incurred many expenses in doing so. Hence, the benefits of the exercise could not be realized immediately. The need to harmonize and manage massive organizational changes The implementation of e-business policies encompasses many risks in that it can impose concomitant changes on an organization's structure as well as affect the profitability of the organization (O'Brien & Maracas, 2008). In the light of Amazon.com, the overhaul in technological systems affected it both positively and negatively. On the positive side, customers were given more access to the services and products being advertised, hence more sales. On the contrary, the technology was misused by selling products to customers at different prices and in quoting commodities that may have been sold (poor updating of the company's web sites). The company should therefore harmonize its technology with the services available; and use the technology to promote sales, not merely to boost its brand status. The need to remove barriers to competition Although amazon.com is currently a global name in the online business industry, it cannot be assumed that it has monopolized the e-business market. The competitors mentioned above are active in amassing part of the share of the market. Amazon.com therefore has to ensure that its hardware and software are up to date and the best for its customers. It is obvious that customers who are not satisfied with Amazon's operations (such as selling items at different prices over time) will shift to an advertiser that is more consistent and fulfilling customer desires (O'Brien & Maracas, 2008). The need to overcome organizational resistance After the formation of Amazon.com, there were rapid changes in the management system of the company. For instance, there were partnership deals with other companies in order to promote the achievement of organization goals. The changes might have included lays-offs in order to absorb members of other business enterprises. However, successful change in management system should entail giving out information to staff on the intent of change so that there are no fears over e-business changes (Tsai, 2003). The need for enterprise change management With the increasing number of web business applications, the key to successful management of e-business is being on top of the market (Tsai, 2003). Changing of productivity and quality are key aspects in ensuring that Amazon.com gives its competitors and edge. The company should be actively involved in updating of prices, checking availability of stock and other fundamental attributes of the e-business. Education and training There is need to equip Amazon.com's staff particularly those interacting directly with customers in order to boost customer-seller relationship. Since the customer is the backbone of a business and the main target, the staff should be effectively trained in order to deliver the best possible services to customers Evaluation of core competencies Instead of being a jack-of-all-trades and a master of none, Amazon.com should identify its key competencies and dwell prominently in them. It is obvious that not all the aspects of the company's current activities may be profitable. It may be ironical that some departments of the company have to work extra just to finance other departments, which have lackluster performance. In the purview of this, it is therefore imperative that the best performing departments be identified in order to capitalize on them and maximize revenue. For instance, Toys 'R' Us joined Amazon. com because it was not efficient in selling over the Internet although it produced some of the best merchandize toys in the world (Carroll & Broadhead, 2001). It is better to have a small performing firm than to have a giant moribund organization. Dealing with expenses Although promotion activities are essential in any business, they are only relevant if the ultimate result is a profit for the firm involved. Otherwise, incurring expenses just to promote a brand name is not in the best interest of an organization. Amazon.com should strategize on the expenses and perceived benefits of advertising before venturing into massive promotion activities. In short, it should cut on gifts, discounts and shipping benefits but strive tom maintain a good corporate image. As mentioned above, any adjustments in the company's information systems should encompass updating of hardware and software in order to make them more customer-centred while improving efficiency and profitability. How the plan works in solving the problems The factors discussed in the plan above aim at improving the relationship between a seller or advertiser and a buyer. While the seller or advertiser wants to maximize sales, the phenomenon should not imply more expenses. On the other hand, while promotions are good at capturing the customers, they should at least be realistic in order to give a customer an urge to buy a product more than once. Otherwise, a strategy such as offering divergent discounts to customers as Amazom.com did is not the best in the scope of the customer. E-business is dynamic and the players just have to be as dynamic they have to remain competitive. Identifying the most relevant field to operate in and applying best knowledge is the best way to cope as discussed above. Looking at Amazon's records, it got a perceived net loss of $1 billion because its expenses and revenue did not match. Since loss or profit is the difference between expenditure and revenue, the expenses in this case exceeded revenue by $1 billion. Conclusion The problems faced by Amazon.com are mainly due to promotion and expansion activities. The company also noted problems in the past due to partnerships with other companies. Amazon.com should therefore be more critical in it promotion activities to evaluate the profitability of such activities while monitoring competition from other players. Recommendations Amazon.com should invest more in hardware and software that are customer oriented and aimed at improving sales. The company should also update its sites regularly in order to keep its customers informed of the latest occurrences in the e-business. Promotion activities such as free shipping, provision of discounts and gifts to customers should be done but only after appraisal of their impacts on the company's revenue. Amazon.com should identify its best strengths (e.g. in selling particular products) and major in the most profitable deals than take every task, which may be a cost in disguise. In expanding and upgrading the information system technologies, Amazon.com should consider the most cost-effective technologies. The company should collaborate with companies whose objectives relate to its own but whose relationship with Amazon.com does not decimate their activities or those of Amazon.com. Amazon.com should invest more in training so that its staffs interact more cordially with customers. The company should be more analytical when calculating profits and losses so that it avoids misquoting loses as profits. REFERENCES Amazon.com. Competitors. 2008. Retrieved November 21 2008 Carroll, J & Broadhead, R (2001). Selling online: How to become a successful e-commerce merchant. Ontario: Dearborn Trade Publishing Free Gifts & Special Offers.2008. Retrieved, November 21 2008 from http://www.amazon.com/Free-Gifts-Ideas-Beauty/bie=UTF8&node=13889001 Kalakota, R. & Robinson M. (2000). E-business 2.0: Roadmap for success. Wellington: Addison-Wesley Lientz B. P. & Rea, K P 2001. Transform your business into e: going beyond the dot com disasters. New York: Academic Press Malecki E. J. & Moriset, B (2008). The digital economy: business organization, production processes and regional developments. New York: Routledge, Mills, J. E. Law, R. (2005). Handbook of consumer behavior, tourism, and the internet. New York: Haworth Press O'Brien, J.A. &. Marakas G. M. (2008). 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