Global Corporate Strategy - A Critical Analysis and Evaluation of Amazon.com

Contents

Abstract

List of Appendices

Introduction
Assignment Structure
Background of Amazon.com
Terms of Reference

Question One
SWOT Analysis of Amazon.com
Conclusion

Question Two

Question Three

Conclusions and Recommendations

References

Appendices

Abstract

In the following, the Amazon.com case study will be critically analysed and evaluated. It will be put high emphasis on the company’s global business policies and strategies from its foundation in 1995 till now by examining the internal and the external environment. The online retailer followed a long-term strategy in order to fulfil its vision and values, incorporating global growth, diversification in product categories and building up the world’s most customer-centric company. Furthermore, Amzon.com’s strategic decision-making and problem solving processes will be carefully analysed and how it responds and copes with changes and difficulties arising from the business environment. This report outlines in the last step the future tendency and the future direction of the organisation by highlighting the strategic thinking behind a long-term approach. Concluding, recommendations will be given which focus on revising their strategy and applying scenario planning.

List of Appendices

APPENDIX 1: Porter’s Value Chain Analysis

APPENDIX 2: Porter’s Five Forces Model

APPENDIX 3: PEST Analysis

APPENDIX 4: SWOT Analysis

APPENDIX 4a: Applied SWOT Analysis on Amazon.com

Introduction

The following assignment has been carried out in order to critically evaluate and analyse the online retailer Amazon.com, by applying the key strategic concepts and models, introduced in the Global Corporate Strategy module at University of Sunderland in 2006.

Assignment Structure

In order to critically evaluate Amazon.com’s situation from the start-up in 1995, the first question addresses to the relevant concepts and analytical techniques associated to the company’s global policies and strategies. The second question focuses on Amazon.com’s strategic decision making and problem solving process and the company’s solutions and responses to changes in the business environment. Thirdly, the company’s post 2004 future strategic direction will be reflected, considering the strategic thinking behind the adoption of a long-term approach to develop an e-commerce business model. Finally, recommendations will be given.

Background of Amazon.com

Founded by Jeff Bezos, Amazon.com started its business in July 1995 as an online bookstore but rapidly expanded into a leading online retailer which offers besides books, DVDs, CDs and videos (still account 70% of company’s sales) a variety of categories including toys, jewellery, home furnishing, apparel, health and beauty supplies, electronics and many more. The revenues have been growing tremendously from $147 mn in 1997, to $ 3.1 bn in 2001 and finally to $8.49 bn in 2005 (with a growth rate of 22.7 % to the previous year and an average growth rate of 141%) Nevertheless, this rise has also led into corresponding losses, leading to a high deficit for the company. Indeed, Amazon.com accounted their first profits of $5.7mn in the fourth quarter of 2001, there exist still cumulative losses. (Krishnamurthy, 2001 and Amazon.com, 2006)

Terms of Reference

The dimensions of strategy are, according to De Wit and Meyer (2004, p.5), the strategy process, the content and the context, which interact and lead to an overall strategic understanding. Indeed, it is crucial when talking about strategy, to draw on terms such as “competition, competitive strategy, competitive benchmarking, competitive advantages and outperforming the competition” (Kim and Mauborgne, 1999, p. 41). Hence, it is important for any organisation to build competitive advantage in order to sustain itself in the marketplace. Nevertheless, there exists no ‘universal’ definition of strategy. (Module Guide, p. 26)

However, De Wit and Meyer (2004, p. 50) stress out that a precise definition for strategy is almost impossible to find but proceed the conception of strategy as “a course of action for achieving an organization’s purpose”. Thus, this course of action can be taken as an integrated process which involves a strategic thought, a formed strategy or a strategic change. In order to be successful in the short term, as well as in the long term, and to reach the organisational objectives, strategic processes need to be structured, organised and nurtured (De Wit and Meyer, 2004).

Question One

In order to critically evaluate the Amazon.com case study, an analysis of the internal and external environment will be conducted in order to review the company’s global business policies and strategies. According to Lynch (2000, p.5), “corporate strategy is concerned with an organisation’s basic direction for the future: its purpose, its ambitions, its resources and how it interacts with the world in which it operates”. Therefore, Porter’s Value Chain analysis (see Appendix 1), which links the value of the activities of Amazon.com with its main functional parts, was conducted in order to evaluate the internal environment of Amazon.com. The external environment was examined by the PEST (Macro Environment, see Appendix 3) and Porter’s Five Forces analysis (Micro Environment, see Appendix 2). Professor Kenneth Andrews (cited in Lynch, 2000) outlines “the importance of connecting the organisation’s mission and objectives with its strategic options and subsequent activities” “The interdependence of purposes, policies, and organised action is crucial to the particularity of an individual strategy and its opportunity to identify competitive advantage” (Andrews, 1987). The SWOT analysis (see Appendix 4) then summarises the findings to identify the current position of the organisation and its capability of coping with the changing internal and external business environment.

SWOT Analysis of Amazon.com

The main outcomes of the conducted SWOT analysis (see Appendix 4 a) can be outlined as follows. Amazon.com is today the largest e-retailer, tied with the e-commerce phenomenon, selling a wide range of products. Once an online book seller, it has now grown “to a virtual Wal-Mart of the web” (Krishnamurthy, 2001, p. 1)

- Examination of the internal environment

According to the conducted Value Chain analysis (see Appendix 1), one of Amazon.com’s key strengths is the customer focused strategy. Jeff Bezos vision of world’s most customer-centric company is one of the organisation’s main goals. It can be outlined that customer needs will be fulfilled as well as innovating on behalf of the customer and personalising the store to each individual, due to the uniqueness of the Internet. (Gregory, 1999) Furthermore, Amazon.com has four value propositions, which are convenience, selection, service and price. Due to the wide product range offered, a high level of customer service and the customer-focused innovation, which is designed to improve the convenience, and the fact that Amazon.com is the broadest discounters in the world in any product category, it gives the company numerous advantages (Case Study, p. 648). On the other hand this can also bear risks as the possibility of brand damage exists due to Amazon.com’s product and service variety.

Over the years, the company has built up a large customer base and loyalty rate. By 2003, Amazon.com was one of the most recognised brands worldwide with a constant growth of customers. The number of customers grew from 1.5 mn in 1997 to 24.7 mn in 2001 up to 32 mn in 2003 with a percentage of repeat customers of 78% in 2000. (Case Study, p. 467 and Krishnamurthy, 2001)

Another major strength is the development of new technologies eg. safety technology for transactions and patented software technology, like the one-click technology, established in 1999, in order to ease the online shopping process for the customer (Case Study, p. 647 - 60). Furthermore, Amazon.com placed from the foundation high emphasis on an expert management team as they recruited for instance a former Wal-Mart Vice President who brought expertise with him in merchandising, logistics and supply chain systems and another Wal-Mart senior manager in 1998 with more than 25 years of experience in logistics management (Case Study, p. 650-51) Johnson and Scholes (1999) recommend it as a key to success as management expertise provides competitive advantage in terms of Amazon.com’s global strategy. Another strength of Amazon.com is that they pioneered the concept of affiliate programmes with other websites (800,000 associates by Sep. 2002) which benefits the company not only because of traffic generation, but also by enhancing their online presence and branding. (Krishnamurthy, 2001)

- Examination of the external environment

Besides strength and weaknesses, there exist also some opportunities and threats. The most important opportunity for Amazon.com is the increasing number of online spending but also continually increasing Internet connection rates. The United Nations forecasted a worldwide online spending of $22 trillion by 2006 because of the higher confidence of customers towards the security and safety of online transaction. (Case Study, p.467) Furthermore, Amazon.com still has books as its core product and the industry is characterised by a high level of concentration throughout the supply chain- publishers, printers and wholesalers. “The top 10 publishers accounted for 20 % of the new titles, the top 5 printers represent 40% of the market, the largest wholesaler accounts for 33% of all books shipped” (Krishnamurthy, 2001, p. 5). In addition, there exists also no dominant player or rival on the retail side and even Barnes & Nobels accounts for only 11% of the US market (Krishnamurthy, 2001). Nevertheless, Amazon.com was too convinced of their first-mover advantage so that they did not fear the competition enough which also took advantages of the upcoming possibilities of the Internet (Case Study, p.649). Especially Barnes & Nobels (BN.com) has noticed some sources of competitive advantage like for instance their higher brand recognition in the US , associated with physical bookstores and their ability to cross-market with Bertelsmann Clubs in many European countries, Japan and China. (Krishnamurthy, 2001) Therefore, there exist opportunities for the company in further diversification in order to get a greater share of online buyers overall shopping, which will be less difficult for Amazon.com as it already has the fixed costs for developing software. Hence, through expansion, these fixed costs can be spread across a sizeable pool of transactions, which then cover the costs. (Business Week, 2001) On the other hand, Amazon.com challenges with further diversification the redefinition of the relationship with its first customers and their brand loyalty. It also has to be kept in mind, that new product categories also bear more risks. (Krishnamurthy, 2001)

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