Strategy Followed by Amazoncom - Essay Example

Index Scope of Business report2 1 Introduction..3 2 Company's offerings: ..3 3 Business Structure..4 4 Strategy followed by Amazon.com 5 2.0Business Analysis ..6 2.1 Human Resources6 2.2 Operations7 2.3 Financial Analysis .7 2.4 Strength and Weakness...9 2.5 PESTEL Analysis .10 2.6 Porters Five Forces 12 3.0 Critical Success Factors: 14 3.1Opportunities and threats15 3.3 Unresolved issues 15 4.1 Future Strategic directions 16 4.2Strategy Evaluation .17 4.3 Recommendation ...18 Appendix.19 Scope of Business Report 1) A) Identify the major strategic business units (SBUs) within Amazon.com during the period described in the case study. B) "What strategies have Amazon.com adopted during the period of the case You should describe these strategies for 1 specific SBU of your choice and for Amazon.com. C) Using relevant models, theory and frameworks explain how and why these strategies were appropriate or not for the chosen SBU and for the corporation. 2) Is the Amazon business model the right model looking ahead for the next five years or more Based on the analysis already undertaken what future strategy would you recommend for the chosen SBU and for the corporation. 1.1 Introduction: Amazon.com is a Fortune 500 company formed in the year 1994 by Jeff Bezos. Though originally formed with idea of selling books through the web to the mass audience through the internet, it has now expanded with passage of time and as a specific strategic choice, to sell any item with a capital "A" online and has added a wide range of items. The company over the initial years has relentlessly focused on obtaining scale of operations which it believes will be the foundation for its future profitable growth. It has been to such an extent that it has sacrificed profits for growth during initial phase and posted its first profit only in the year 2003, nearly after nine years of operations. The strategy followed is a customer focused approach which the company believes will help it attain the scale it needs for long term success. 1.2 Company's offerings: 1.2.1 Product: Amazon .com sells operates in North America as well as internationally through retail websites which include amazon.com, amazon.ca, amazon.de, amazon.fr, amazon.co.jp, amazon.co.uk, shopbop.com, endless.com, and the Joyo Amazon Web sites at joyo.cn and amazon.cn.. It sells its product in over 200 countries. The product range which its sources and sells are books; electronics and computers; toys, kids, and baby; sports and outdoors; movies, music, and games; home and garden; apparel, shoes, and jewelry; tools, auto, and industrial; digital downloads; grocery; and health. Amazon.com, Inc. operates retail Web sites, as well as provides programs that enable third parties to sell their products on its Web sites. It enables customers to use single click technology to complete purchase of all sellers and check out, making purchase easy and convenient. The company's Amazon Enterprise Solutions offer sellers e-commerce expertise, technology, and operational infrastructure to enable e-commerce businesses operating under their own brand name and Web site address. It also offers Amazon Web Services, which provide access to technology infrastructure that developers can use to enable virtually various types of businesses. 1.2.2 Price: The unique offering of Amazon.com is its ability to offer products at a price lower than any other retailer, because of its unique model (no expensive retail space). 1.2.3 Promotion: MillionAmazon.com has steadily increased its spending on advertising and promotion and brand building. In 2005 it valued its goodwill as $159 million. Amazons unique brand image as a top web based retail company built right from day one, is what drives the company's growth. 1.2.4: Place/ Supply chain management: Strong delivery system is one of its strong points of Amazon.com. To manage logistics it believes in having strong analysis based systems. It uses mathematical modeling and algorithms extensively to forecast, match delivery centres, products storage.-the end result being shipment in 24 hours at lowest fulfillment costs. 1.3 Business Structure: Geographically the company segments its business into North American sales and International sales. Within this it segments its business further as Media, Electronics and others. Apart from offerings to retail buyers through above it also offers business services alike Amazon Simple Storage Service (Amazon S3) solutions to other e-commerce business based on the technology and expertise developed by amazon.com. However based on the size of the business the company's business these can be grouped as following strategic business units (in the order of size of business of these SBU) 1. North American Media 2. International Media 3. North American Electronics and others 4. International Electronics and others The functional areas of the company like product development, technology content and development and supply chain and delivery management cuts across these all these SBUs like in a matrix organisation. 1.4 Strategy followed by Amazon.com: The initial year's policy of Amazon (which extended well up-to the eight year of operation) is one of building scale of operations through building a customer base that will be the foundation for long term profits. Amazon.com believes that its success in the long run is going to depend on its ability to maintain and grow its customer base. For this an intensively customer focused policy was followed to give an experience that will be far ahead of what competition will be able to give. Enhanced customer experience through offering wide selection (with decision -enabling and personalized information), shopping convenience (one click technology where different goods can be grouped), discounted pricing and efficient order execution were the content of the service. Innovation in offerings and technology were the foundation on which these were built. This is how Amazon.com has created a clear and sustainable competitive edge. Mergers and acquisitions and strategic alliances were other strategies followed by the company for achieving its growth target. 1.4.1 Media segment and strategic offerings: Amazon.com has consistently been attempting to bring to its online customers the same experience one would get while browsing at the conventional reading shop and many times excelling it. Through the acquisition of Booksurge, it could print titles virtually on demand by the customer and deliver it. Mobipocket was another and through the combination of Mobipick and Booksurge it would not only print and supply on demand, but would save costs in terms of storage space and other fulfillment costs. Amazon pages and Amazon updates allow the customers to do exactly what they would in a book shop- browse through. Shipping discount offerings (for example purchase offerings above 15 $) typically targets customers of the media. Remembering customers and their choices and making recommendations, updates are particularly relevant to the media segment. Maintaining customers and obtaining repeat orders from them is again something more targeted towards customers who buy books, music, DVDs. 2.0 Business Analysis 2.1 Human Resources: The Company consistently followed policy of going for the best in industry for manning its top positions, to the extent that Wal-Mart complained of poaching in during the early days of the company. (Business Week: December 14, 1998). (Unique Resource) Modern call centre built at Tacoma, offers unique services to customers (Unique Resource) Software development centres at Bangalore, Chennai and Capetown S.Africa and Iasi, Rumania are examples of huge investment it makes in HR related to its strategy of technology development. (Competence) 2.2 Operations: The Company has built strategic partnerships with buyers through which it offers benefits of scale of operations (lowest prices). Amazon.com aims to ship 95% of products on the day they are ordered. The company has also invested heavily in warehousing and material handling systems to achieve multifold improvement in throughput. (Competence and unique resource) 2.3Financial Analysis Revenue growth of amazon.com for period 2001-05 exceeded most of its comparable competitors as shown below Figure 1 Percentage change in competitor revenue 2001-05 North American segment growth for the period 2001-2005 was less than comparable growth in international segment growth 92003-5), whereas the growth in segment income for north America exceeded that of International over the comparable period, as can be seen below * It was higher at 444% for 2001-2004, as there was a dip in segment income for 2004-5 When comparing percentage growth over the last 5 years (2001-2005) for the SBU, growth for international media has been highest followed by North American others and North American electronics as seen below Figure 2 %Net sales growth for SBU 2001-05 Overall it indicates that the model followed by Amazon has achieved growth as planned through its strategy of customer focus, but has not achieved consistent profitability that will satisfy share holders 2.4 Strength and Weakness: The strengths of the company are: Unique model by which expensive retail space costs are avoided. Early movers advantage which is still working in company's favour. Assiduously built and maintained customer base Patented and otherwise developed technology for internet retail Lean and low overhead expenses Strong brand image Proven ability to consistently and constantly innovate Strong use of "Math-based" decision making in logistics Weakness of the company is: Inadequate management of relationships and partnerships leading to conflict and legal suits Business model followed will continue to be unproven, until profits are made consistently over years. Unable to manage customer "walk in" during peak hours leading to loss of sales, business and goodwill 2.5 PESTEL Analysis Political: Government regulations on outsourcing, offshore development of software call-centres Prevention of monopolies, especially how small retailers will be affected and will be protected-this could be significant in emerging markets. Economic: Economic growth, GDP will directly affect retail sales. All markets are connected and (globalization) therefore economic slow-down, recession will directly affect retail. Market meltdown, like the one in 2000 significantly affect shareholders value. Social Cultural differences, especially in Asian markets, will mean customer base with different preferences and tastes will mean building scales in each market. Perception of retail experience different for different products Technology Vast scope for technology growth outside company, mean equal opportunity for all to exploit Technology obsolescence and cost Environmental Environmental safety, laws may affect procurement of goods (e.g. Chinese toys) Multiple products, multiple sellers scenario which amazon.com regularly faces, is fraught with potential legal conflicts on exclusive marketing issues, patent related issues etc; Amazon has already faced issues in cases like Cartier, ToysRU, Drugstores 2.6 Porters Five Forces Barrier to Entry: Amazon.com has attained a size which will be difficult for new entrants to attain in the near future. Uniquely differentiated product offering which will be difficult for new entrant to offer Force: Low Degree of rivalry: Among its rivals Wal-Mart is the emerging competitor, though it was a late entrant to ecommerce, has much higher presence in retail space than Amazon Amazons market share of overall retail in US is only 4% ($ 4billion vs $ 104 billion, see appendix) Force: Medium Threat of substitutes: Retail sales, direct sales models (AVON) which also have low price models already exist Media items especially books have no substitutes, there is no substitute for reading experience, however new forms of reading tools may emerge which begin to give the same experience books give Force medium Buyer power Buyers are heterogeneous internet users, Scope for buyer to switch loyalties if buying offering of Amazon is matched or exceeded. Force: Medium Seller Power Sellers could do forward integration, or form a cartel. Sellers will be happy to supply through a channel which makes end price cheap, and thereby increases demand-as long as their margin is not eroded. Force: Low 3.0 Critical Success Factors: Continuing to create value for customer such as giving him personalized service based on his profile, give experience nearest to browsing in a shop, convenience of purchase, unique offerings (print and supply books not in stock)-all at low cost. Begin to create value for share-holders by beginning to make profits on a sustained basis (they have waited long enough for this) Add and maintain customer base Continue to reduce fulfillment costs through optimizing storage and delivery Continue to innovate ("out innovate" competition) and offer new value additions to customer 3.1 Opportunities Growing no. of internet users (see appendix b), means more potential online buyers Increase by 50% of per capita annual spending on online purchase from $457 to 784 from 2001 to 2006. Increase in growth in publishing @annual rate of 2.02% between 2006-2011 (Infotrends 2008) 3.2 Threats Threat of spammers to misuse company's portal and cause damage to reputation, Increasing exposure to potential litigation due to infringement of rights, violation of contracts Government legislation on protecting small business from big ecommerce/online retailers 3.3 Unresolved issues Amazon.com has still not resolved the issue of when to start consolidating and when to start making planned profits on a sustained basis. While the business model has brought with it the scale and size it wanted, how to ensure the long suffering share-holders are rewarded How to plan for sustained profits Will it have to be at the cost of lowering, marginally at least, customer focus Is the goal of trying to provide all items with a capital "A" to online buyer the right one Is there merit in trying to be the online Wal-Mart 4.1 Future Strategic directions 1. Target to bring in more and product offerings to customer by continuously increasing range, target new and existing customers, intensive customer focus-in short follow existing strategy. 2. Plan for profits, Be selective in adding new products (e.g. Limit products that have low shipping costs to product cost ratio, has large consumption base) 3. Rely more and more on products where the delivery responsibility is on the seller, thus reducing fulfillment cost 4. Focus only on products that have higher margins 5. Enter new business like launching new search engine 4.2Strategy Evaluation All the above strategies excepting No. 5 will more or less score the same on suitability test, because they are not radical departures from existing ones. No. 5 is based on the in-house competence developed by amazon.com (strength). An opportunity presents to become a niche player as search engine company. All are evaluated below therefore for Acceptability and Feasibility. Strategy Option Acceptability Feasibility 1 Financial returns will remain same, cost of operations will be higher, Risk of lower profit and hence may not be acceptable to shareholders Existing and feasible, Resources tuned to operate for this strategy 2 Financial returns will increase, risk of growth slowing down, risk of missing products due to error in judgment; will be acceptable to all stake-holders Will need developing criteria and competencies, company already has resources for this. 3 Company profits may increase, but growth may be affected, long term risk of company's core value offering getting eroded. Risk of union problems when delivery related staff gets retrenched. Downsizing of fulfillment department (surrender of warehouse, retrenchment), will release financial resources 4 May mean greatly restricting product range, both growth and profits will suffer in long run Same risks as above 5 Spinning off another separate SBU, will give returns in the long run, but will have repercussions on profits of company; Unless spun off as separate company may not be acceptable to share-holders May have to find financial resources externally, will have to recruit in large scale and put in large amount of time and executive resources 4.3 Recommendation: A fine balance has to be struck by Amazon.com in pursuing its current business model through existing strategies and one that satisfies all stake holders. A strategy of partially shifting focus to increase profits of the company sustainably from now onwards is essential. Adoption of strategy 2 seems to be a compelling need. Amazon.com can also do a detailed feasibility study of strategy 5 as it has high growth potential before taking a decision on whether to pursue it or not. Annexure A Appendix Businessweek.com/b3608001.arc.htm c, amazon.com The wild world of e-commerce, 14 December 2008, accessed 6th December 08 Goecart.com, E-Commerce Market Size and Trends, http://www.goecart.com/ecommerce_solutions_facts.asp accessed 6 December 08 Hill, C. Jones,G. Galvin,P. Haider,A. (2007). Strategic Management-An Integrated Approach 2nd ed Kotelnikov Vadim, New Business Model and Venture financing, Amazon.com case study. http://www.1000ventures.com/business_guide/cs_biz_model_amazon.html, accessed 7, December 08 Read More