Business Strategy Amazon.

c om

Executive Summary:

This case is about the changes that occurred in Amazon.com between the years 1995 to 2004
taking through the different stages of the company’s developing phase which gives us an insight
into how one of the major online brands of our time has emerged.

In this study report we tried to analyse Amazon.com company’s Competitive environment, its
resources and capabilities to sustain the growth on long run and study its sustainable competitive
advantages and its business model in detail. We also studied its First Mover Advantage and
difficulties in maintaining the position in this report.

Starting with the Competitive environment we studied it in detyail applying three tools of
business strategy PEST analysis , POTER’s Five Force and SWOT analysis frame works to
understand External Macro-environment, External Micro-environment and Internal environment
respectively and arrived at Key Driver of Change and strength, weakness, opportunities and
threats of Amazon.com.

We studied the business model and analysed the resources and capabilities that had the potential
to drive Amazon.com successfully in future too. For this we have used resources analysis models
PROFIT analysis and VRHN analysis for our study.

Finally analysed the First mover advantage benefits and the difficulty of maintaining that
position with regard to innovation and profitability and presented that in an analytical frame
work adding conclusion and recommendation at the end of the report.

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Introduction:

Amazon.com is an American e-commerce company and is the largest online retail portal in
America, which started in the year 1995 , in Seattle initially it offered various book tiles (it
started basically as an online book store), as a part of expansion in the year 1997 it went public
with Initial Public offering (IPO) – 3 million shares raised $ 50 million by the now the company
had 617 employees and had a huge customer base of 1.5 million, constant innovation and
extensive relationship with the emerging internet player like Yahoo ,AOL.com ,@Home service,
GeoCities.etc., ensured the momentum of brand imaging of Amazon as leading online book
seller ,reinforcing the awareness and customer flow for the business. In the year 1998
experienced a rapid growth ,by the end of the year 1998 they have served 6.2 million
customers , had more than 60,000 associate members (partner portals) , diversified their products
in US market , entered into new markets UK and GERMANY, manpower increased from 617 to
2100 full timers revenue jumped from $148 million in1997 to $609 million at the end of
1998.the year 1999 was a rocket year for amazon.com ,the company served 17 million
cumulative customer accounts in over 150 countries, introduced One-click purchasing, expanded
and diversified aggressively into toys , games and electronic stores the employees count jumped
to 7600 by by the end of the year and the associations programmes were nearly 430,000 seven
times more than the previous year. From 1995 -1999 Amazon.com was growing very fast. In the
year 2000 due to Dot com burst company stock price at $58.47 in June 1999 fall to $15.56 in
December 2010. The company started cost cutting measures, in 2001 company expanded into
France and Japan , but stock price fell to weak low of $5.97 in September 2001,but by the end of
2001 things were at the turning point, which were evident in 2002 where the company made its
first annual profit of $64m and success continued in 2003 ,because at the end of the 3rd quarter
were$3.3 billion with 33% sales from outside US. 2003 was a very successful year in all ways
for Amazon.com , it was in this year Amazon.com created a phenomenal act of E-Commerce
history with the help of FedEx and US postal on 21 June , 2003 by delivering 789,000 copies of
Harry Potter and the Order of the Phoenix the same day the book was released. This is the story
of Amazon.com until 2003 which is described in the case , but still Amazon.com is a living
brand , the domain amazon.com had 615million views in the year 2008 and monthly only in

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the US it receives at least 60 million views this show how much it became the part of online
shopping worldwide.

Competitive Environment

The competitive environment consists of two major parts , external environment and internal
environment ,the external environment contains Macro-environment and Micro-environment.
Now therefore the analysis of competitive environment encompasses various tools to analyse all
these sub environments to understand the way the business is done.

External environment:

Macro-environment:

For analysing the macro environment we use the tool called PEST , that studies the politico-legal
economical , socio-cultural and technological factor that effect the way the business is done in
the environment.

PEST: with respect to the case and the company the factors are:

Politico-legal factor:

 The cyber laws governing the E-commerce in internet:

Technology is highly volatile, therefore for security reasons and protection agints
cybercrimes like phishing, spoofing strict cyber policies are made

Economical factor:

 Increasing number of developing and developed economies.

The increasing number of developed and developing economies indicate the growth rate
of infrastructure and financial resources to afford technology that will change the life
styles.
 Increasing disposable income of the individuals.

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Socio-Cultural:

 Lifestyle changes (Technology changes the living standards)

 Younger generation (Gen-X, very quick adaptation of change in the tecnology)

Technology:

 Internet changes the world (World wide Web - the new market place)

The internet is the new phenomenon the very thought of an inter connected network of
people changed the way the way business are done changing Commerce into E-Commerce.

Key Drivers of Change

1) The cyber laws governing the E-commerce in internet

2) Increasing number of developing and developed economies
3) Lifestyle changes (Technology changes the living standards)
4) Younger generation (Gen-X, very quick adaptation of change in the technology)
5) Internet changes the world (World wide Web - the new market place)

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Micro-environment:

Potter’s Five Forces Model :

For analysing the macro environment we use the tool called Porter’s Five Forces, the five forces
gives us the understanding of our micro environment (industry analysis).

FORCE 1: Threat of new entrants

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The threat of new entrant is high because internet is an open source, cheap easily accessible
therefore since the investment is low there will be new entrants coming in very easily but due to
the innovative and large market size , Amazon.com has the competitive advantage.

Force 2: Bargaining Power of Supplier

The bargaining power of the supplier is high because in this business there is nothing being
manufactured by amazon.com it is acting simply as a virtual market place for the different
suppliers to sell its goods worldwide on a common platform so the suppliers are having more
bargaining power because can by themselves at anytime start online stores of themselves.

Force 3: Bargaining Power of Buyer

The bargaining power of the buyer is high because in this business there is always an option for
the buyer to get it from a physical store at the same discounted price but it only matters his
convenience that these kind of online services came into existence, there is always a high risk of
aversion due to many factors , so bargaining power of customer become very important for the
long term sustainability of this kind of business model.

Force 4: Existing competition

The competition is high because, in the virtual space anything can be adapted within hours ,the
threats of direct competition is though low but from indirect competition like Barnesnoble.com,
Ebay.com, Priceline.com the threat is high because they have physical infrastructure supported
by an online arm , by diversification Amazon’s competitors are getting multiplied but only few
companies would present serious competition to Amazon’s dominance in the online business
world. There is high possibility of latent competition from traditional retail giant like Wal-Mart

Force 5: Availability of substitutes

The availability of substitutes are high , because always we can buy a book or any consumer
items like books ,music, toys ,gifts ,and apparels all of them at a conventional retail outlets ,
large shopping malls, its only the matter of convenience and availability.

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Therefore the online retail industry is highly volatile and growing; the industry is very attractive
because of the low investments and recourses availability but has high threats and barriers of
entry dominated by big companies like Amazon.com.

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Internal Environment

The internal environment analysis is done using SWOT analysis, by looking at the company’s
strengths and weaknesses.

Strength:

 Strong leadership, the CEO and the Top Management of the company.
 It develops its own technologies and online software which add to its core competencies
with constant up gradation.
 It has a strong satisfied customer base of nearly 32 million because 60-70% of its sales
are because of repeated cutomers.
 It has a large group of associate programmes with 900,000 members like Yahoo, AOL
,GeoCities ,@HomeNetworks(Strong Internet Players)
 Wide range of products under one platform from books to barbie dolls products from
A To Z are available in AmaZon.com
 Very well built distribution structure , so better bargain and lower price strategy
 First Mover advantage helped achieving the economics of scale.

Weakness:

 Only relaying on word of mouth , they by themselves are not involving in market
penetration.
 Doing business online is highly volatile and risky because of high information insecurity
and imitation and technology innovation it is frequently changing environment.

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 Diversification of amazon into different products and services may effect and dilute the
brand image of the company.

Opportunities:

 Amazon has an opportunity to develop into new emerging markets like India where the
online retail is in the early growth stage.
 Amazon has to do more mass campaign programs worldwide to tap more customers and
increase it Non-US (international) market sales which is nearly 35 % to high.
 American online retail market is in maturity stage , its time for aggressive takeovers,be
active and consolidate the market.
 Build collaborations with physical infrastructure and public libraries which will increase
the accessibility to rare and archaic collections in the online stores.

Threats:

 Low or no product differentiation, because the same b ook is sold in any other web site
 The free shipping for above $250, is eating into the company’s profit .
 Cheap and quick availability of technology for duplication pose a major threat for these
companies inviting high competition.
 High threat of hackers through phishing, piracy and spoofing.

Through SWOT analysis we tried to understand the internal environment of the Amazon
Company. With this complete the external and internal analysis of the competitive environment.

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BUSINESS MODEL

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A business model is an encapsulation of all the components of a particular business. A business

model explains how the business operates, what are the operations carried out in the business
and explains how these operation result in generating its revenues.The business model of
Amazon.com is that it is an American Multinational Company which is mainly into online
retailing business. On time delivery of goods, satisfying services and adequate information to
its customers was the Amazon way of doing their business . Operations are the competitive
advantage of Amazon.com. Amazon business model mostly relies creating more choice and
convenience for the online shoppers who can buy anything they want at one place.

VHRN and PROFIT analysis is done to know the capabilities and potential of the business model
of the Amazon.

VHRN amalysis

Valuable: The main value of amazon.com are its 32 million customers generating $56.8 billion
across over 150 countries, it encrypts all its customer data carefully because it values it s
customers choice and offers convenience accordingly. Because it gave so much value to its
customer it is the largest e- retailer in the America.

Rare: though the products that amazon.com sells is similar to any other competitor’s product but
the process, the technology and software they produce in-house according to their customers
convenience and the companies association with more then 900,000 different domain intenet
players is a very rare competence any company has.

Hard to Imitate: the business model of Amazon.com is not very easily imitable , competitors
like barnesnobel.com , ebay.com are still not able to imitate because of the large customer base,
strong distribution system and great service amazon.com provides for its customers through its
unique business model.

Non-Substitutable: the brand image that amazon.com enjoys as a n one stop online shop for
A to Z shopping online is non- substitutable because unlike conventional technology spike ,
Amazon utilized technology in long term business running , a rare combination which built the
sensitive yet accurate business model for satisfying all online customers needs .

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PROFIT analysis:

P- Physical:

Physical resources are tangible resourse that include inventory ( distribution center ) , database
center (data mart) having information on the customers, infrastructure handling all the
technology all come under the physical resources of Amazon.com

R- Reputation:

It is an intangible resource, the brand value is an intangible asset for the company because it is an
25 years old company with nearly 615 million view per year for the domain name amazon.com,
only in America nearly 60 million views per month

O- Organizational:

It is a 25 years old organization with 21,600 employees and $13.8 billion worth ,serving over 32
million customer across 150 different countries with its 6 websites and more than 900,000
associate program portals.

F- Finance:

Financial value as per 2009 :

Revenue is $24.509 billion

Operating income is $1.129 billion

Net income is $902 million

Total equity is $5.26 billion

I- Intellectual and Human resource

For Amazon.com Company it is one of the critical success factors. It is an intangible resource
which is ignored , which includes the leadership, top management, the employees in the
organization ,companies business model and its relation with the customers all of them comes
under intellectual and human resources.

T- Technology:

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The most important critical success factor for Amazon Company. The in-house technology and
software development, is very important resources that differentiates the process of Amazon over
its competitors.

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Potential for the model to continue to be successful:

For any business model to sustain over a period of time it should be started from the customer
need, if a company caters to the changing needs of the customer it will suatain for a longer time
as compared to a product oriented business approach which may result in success or failure of
the product which may decide the existence of the company.

Amazon’s corporate strategy is completely customer oriented and it has a loyal and huge
customer base of 32 million in 150 countries, its process like One-click ordering are patented and
service delivery is quick , its pricing is low due to economies of scale and a very strong supply
and distribution networks and the sales are good company is reaping profits the business model
of Amazon.com is highly potent to continue successfully.

First Mover Advantage:

The term “First Mover”, means a company entering into a new market or developing a product
for a new market, they are the pioneers of the market or the product. There are benefits and
difficulties in having first mover advantage, firstly a company to have the benefits should have
the resources and capabilities and then it should pit them into full use to get maximum benefits
out of being the first mover of the market.

Benefits of First Mover Advantage can be reaped by technology leadership, resources control
and customer lock in.

Technology leadership:

With technology leadership , the first mover will understand the technology properly and patent
it and make it hard for the later entrant to adopt by doing this he will create entry barriers for new
entrants and meanwhile with his understanding ,develops and achieves cost effectiveness

Control over resources:

When you are the first mover , you are exposed to the entire environment ,if u study and plan
properly you can create high entry barriers as well as enjoy larger market share be market leader
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until the market reaches saturation , by control over my resources like suppliers, distributors and
dealers, sources of finance , manpower, physical resourses will give an competitive edge in that
environment being the first mover.

Customer lock-in:

When you are the first mover your customer base is more than the later entrant at any point of
time ,but how many loyal customers you have, this is where the former two benefits come in
with your recourses and technology you lock-in your customer by providing exactly what he
wants and by providing souvenirs like privilege card

Difficulties:

As I already mentioned apart from the benefits there also difficulties

Innovation:

In terms of investment the first mover has to invest a lot on innovation , market research ,
development and penetration which will make the environment fertile for the later entrants for
whom it will only take to educate the people about the product .it is easy for the companies that
come later to work on the pitfalls made by first mover where the first mover becomes like a rat in
a laboratory. using reverse engineering the laters will reproduce same product with
differentiation and at cheaper price because that technology becomes cheaper by then, the new
companies coming later will device new technologies making the patent protection investment
almost useless for the first mover.

Profitability:

The investments made by first mover in many areas like R&D, infrastructure, technology and
innovation will be taken advantage by the later entrants, which will reduce the profitability of the
first movers. The later entrants not only cut into the market share but also into the profits of the
first mover .The financial risk associated with the first mover is high because he invest in market
research, market development and market penetration which will be readily available for the later
entrants for high price which is a disadvantage for the first mover . therefore because of huge

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investments the profitability also gets affected for the first mover takes longer time and effort for
first mover compared to the later entrants.

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Conclusion:

Thus by this case analysis we can conclude that Amazon.com is like a large online retail mall
displaying a wide range of products making it a one stop shop for all its online customers .they
are pioneers in technology and have effectively utilized first mover advantage to create large
customer base in US and also internationally across nearly 150 countries and forming large
associations creating high entry barriers and with a successful and well balanced business model
will in future emerge as the world’s largest E-retail company.

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Recommendations:

 Amazon.com should start introducing itself to emerging markets like India , Brazil not
only by geographical expansion also by language . for example Amazon India should
have Hindi and Tamil and Amazon Brazil should have Spanish version.
 Since Amazon is operating in a highly competitive market facing huge expenses and
working on low margins , it should stop the free shipping policy because it is eating up
into companies profits, need not charge the whole but can ask for minimum charges.
 In order to gain competitive advantage and increase its sales, they should introduce
customer reference system which will increase the word of mouth and it will also help in
new market penetration.

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Bibliography

David.F.R. (2007). Strategic Management. NewDelhi: Prentice Hall of India .

Gerry johnson, K. S. (2008). Exploring Corporate Strategy. Prentice Hall.

L.Wheelen. (2007). Essentials of Strategic Manegement. New Delhi: Prentice-Hall of india.

R.Jones. (2005). Strategic Management. New Delhi: Biztantra,Dreamtech Press.

Scholes. (2007). Exploring Corporete Strategy. NewDelhi: Pearson Education.

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