Table of Contents
1. “ Avanced Strategic Management” 3
1.1. Industry analysis of Amazon – Porter’s Five Forces
1.2. Roadmap of Amazon’s strategic intent – Pros and Cons of their strategic choices
1.3. The logic behind Amazon’s full retail stores – a strategic rational between location and technology
2. “Business Development”
2.1. Amazon’s strategy during the period 2007 to early 2010
2.2. Amazon’s strategic capabilities
2.3. Amazon’s diversification strategy
2.4. Development and justification of a possible Amazon’s future strategy
3. “International Business Game”
3.1. Explanation of “Network Effects” and its impact on Amazon and the “International Business Game”
3.2. Explanation of “Transfer Prices” and an Outline of its application at Amazon and the “International Business Game”
3.3. Excess liquidity and its influence on long-term debt’s interest rates in the “International Business Game”
1. Advanced Strategic Management
1.1. Due to Amazon’s broad market and product diversification they are nowadays exposed to a highly complex and competitive environment. The Porter 5 forces analysis helps us to construe the whole environment and to identify the individual, influential strengths of the company. By doing so, the emphasis is put on the five forces “Competitive Rivalry”, “Threat of New Entrants”, “Bargaining Power of Suppliers”, “Bargaining Power of Buyer” and Threat of Substitutes”.
The prevalent rivalry in the E-Commerce business continuously intensified over the past decades. Nowadays every brand offers their products over their online-shop besides to their local retail stores. Major competitors, additionally to all online-retailers selling products that are simultaneously part of Amazon’s product portfolio, are Alibaba, Ebay, Flipkart and Walmart. Due to the increased competitive situation “Competitive Rivalry” must be interpreted as a strong force with high importance for the leadership of Amazon. Moreover, it has to be put huge emphasis on Amazon’s customers. Those customers can be separated in the groups “Customers of Amazon marketplace”, “Buyers of Amazon Web Services” and “Sellers on Amazon marketplace”. The “Customers of Amazon marketplace” are characterized by the highest bargaining power of these three customer segments and are therefore very price sensitive. In the last decade, the availability of online marketplaces increased rapidly. Thus, this increase led to an intensive competition between E-Commerce retailers. Due to that and due to the low switching cost, the customers can choose out of a huge selection of websites and substitute products. Furthermore, the nowadays easy access to information contributes to the increased amounts of options. The “Buyers of Amazon Web Services” have a less bargaining power due to the existence of switching costs to an alternative service provider. The “Sellers on Amazon marketplace” have a moderate to low bargaining power, because besides Alibaba, Flipkart or Google, there aren’t any other companies that provide a global online marketplace. To summarize, the afore mentioned facts lead to the assumption, that the overall bargaining power is high and on the customers, as a strong force, have to be kept an eye on. By observing the possible substitute options, it becomes clear that there are existing two different types of substitutes. Direct substitution is coming from physical stores. These are directly competing with the Amazon services of any kind. Moreover, catalogue retailing or online retail shops are indirect substitutes for the different Amazon online marketplaces. As mentioned earlier, the biggest competition comes from retailers like Alibaba, Walmart, branded outlets and online stores of brands, whose products can as well be found in the product portfolio of Amazon. Therefore, the threat of substitutes has to be interpreted as high, due to the afore mentioned reasons cf. (Greenspan, 2017). By putting the emphasis on the “Bargaining Power of Suppliers” it comes clear that Amazon is able to control their supplier. Due to a set of rules and regulations they are able to protect their comfortable negotiating position and don’t give their suppliers the possibility to influence product prices. Furthermore, even due to many other competitors providing promising sales platforms, Amazon nevertheless attracts a lot of suppliers, due to its intensive brand reputation and huge customer base. Therefore, it can be said that Amazon’s suppliers possess limited bargaining power. Thus, suppliers represent a force of low to moderate threat. The same applies to the threat that comes from new entrants. Amazon doesn’t have to be afraid of new entrants. They developed very high economies of scale over the last decades, which provides very high entry barriers to possible new entrants. Even the fact that it’s easy to create an online store is almost negligible, due to the circumstance that very high investments in warehousing, distribution, logistics and marketing, as well as time and brand reputation are playing an important role in order to be able to catch up with Amazon. Thus, potential new entrants constitute a rather low threat cf. (Adamski, 2017).
By setting the focus on the timeframe observed in the underlying case study, it comes clear that back in 2009 Amazon didn’t possess that of a strong and competitive market position. This mainly comes from the fact that in 2009 Amazon was operating in a limited number of marketplaces. These were media, electronics, other general merchandise (EGM) like grocery, apparel, jewellery, automotive parts, as well as the Amazon services. If one of those segments had struggles, this had a way more intensive extent to Amazon than nowadays with much more different market segments. Furthermore, in the timespan of 2007 to 2009 they didn’t offer innovative products like the “Amazon Fire TV Stick” or “Amazon Echo”, which enormously strengthened their market power. Nonetheless, back in 2009 Amazon already possessed a very competitive position in the e-retail market. Where others were struggling, Amazon managed to overcome difficulties like existing high entry barriers due to the expensive set up of online stores, maintenance costs, data protection and security through their high investment rates, innovative power and customer-centricity instead of being skills-focused.
In terms of the “Porter’s Five Forces” analysis its applicability at nowadays markets needs to be taken into consideration. This kind of analysis assumes perfect markets and is best applicable for the analysis of simple market structures. Due to digitalization, globalization and deregulation completely new market dynamics evolved. In other words, these major trends developed a new external environment characterized by volatility, uncertainty, complexity and ambiguity. Therefore, “Porter’s Five Forces” analysis has some limitations in complex industries with multiple interrelations, product groups and segments, just like this is the case for Amazon’s operating markets. Furthermore, technological breakthroughs, startups or market entrants from other industries possess the power to totally change business models, entry barriers and relationships concerning the supply chain. Nonetheless, Porter’s model enables managers to think about current situations in a structured, easy-to-understand way, initiating further analysis cf. (Recklies, 2015).
1.2. In 1994, Amazon started with their ambition to become the world’s biggest and best online bookstore. As we know, they now developed into a company that provides almost anything to their customers by their customer-centric approach. This was driven by a process that included three steps. As stated in the case, this starts by figuring out what the customers want by directly asking them, finding a way how to provide it to them and the final execution. Secondly, it is important to continuously innovate in a way that the customers are benefiting, figuring out what they are unaware of what they need and finally executing these things, as Jeff Bezos is stated in the case study. The last important asset of Amazon’s customer-centricity is the redecoration of their online-store to establish customized versions to every individual customer.
In order to achieve Bezos’s vision of being the most customer-centric company in the world, they developed a “Three Pillar” strategy. This strategy is set up in a way that the three pillars “selection”, “price” and “convenience” are continuously driven and supported by innovation and investing in the future, which constitute the fundamentals of Amazon’s strategy. The pillar “Selection” targets at offering the broadest variety of products reaching from simple retail products to Amazon’s software and cloud computing services. Furthermore, their strategy includes their ambition to price leadership by simultaneously guaranteeing a consistent level of high quality among all their products and services. “Convenience” completes their “Three Pillar” strategy by putting the customer in the middle of all of their activities and processes. Particularly their high investments into innovations target at continuously improving customer satisfaction, as well inventing tools to capture and analyze customer data in order to increase their customer’s shopping experience.
Over the course of the years Amazon’s steady investments in technology led to an efficiency improvement, which enabled them to offer lower prices to their customers by decreasing operational costs. Furthermore, those heavy investment rates made it possible to extend their product portfolio by new inventions like cloud computing services, “Kindle” or “Amazon Web Services”.
One of the major advantages of Amazon’s strategy is that they noticed very early the importance to build and adjust their business model around the customers. The connection of all of their R&D activities with the ambition to better understand and satisfy their customers, gives them an advantage over most of their competitors. Already in 2009, they were able to easily adjust their customer treatment, by automatically applying their invented tools on all of their customer’s activities without being forced to establish elaborate techniques to analyze customer behaviors. Furthermore, their understanding to not hold back and the necessity to continuously putting emphasis on future innovations, enables Amazon to successfully defend and even expand their position as the global force in e-commerce retailing. Besides that, their steady technological innovations contribute to being able to exploit new markets. This could be seen on their expansion of their product portfolio through services like cloud computing, which led to a totally new customer base.
Nonetheless their strategy provides some disadvantages. Due to their wide-spread product portfolio a real firm identity is hard to determine. The continuous extension of their retail products and services involves the danger of not being able to sustain as customer-centric as they aim to be. Furthermore, there is always the threat that somebody is able to provide products cheaper as Amazon. A huge part of Amazon’s customer’s loyalty emerges from customer centricity and price leadership. If Amazon is unable to provide these and in combination with a lacking firm identity, this could cause a tremendous reduction of their customer base. Thus, their main disadvantage lays in the fact that “price leadership”, one of their core values, is lacking in uniqueness and that product extension and increased customer centricity can be interpreted as contradicting processes. Additionally, their financing strategy of offering short credit terms to its customers and long payment terms to its suppliers, as stated in the case study, can provide huge risks. Due to the fact that companies are exposed to many threats they can’t control or acts of nature, which can create severe losses or even insolvency, it is a difficult endeavor to operate with customer’s funds as their working capital. Moreover, this is some kind of exploiting their customers and contrary to their customer-centric approach.
1.3. A few years back, the reduction and total disappearance of physical stores were a wide-spread assumption in almost every industry. Nowadays, it is obvious that the lifetime of physical stores is not unlasting cf. (Trefis, 2016). Therefore, Amazon hoped on this trend for five major reasons as described in the following. Firstly, this new strategy dates back to their core value “customer-centricity”. By building physical stores Amazon anticipates creating more emotions and proximity to their customers by bringing back traditional shopping patterns. Moreover, in terms of technology it seems like the right fit, because due to Amazon’s high technological standards it is not necessary to acquire new employees for their shops through their inventions like a digital cart and automatic payment in their Amazon Go shops cf. (Robischon, 2017). Another fact that led to the strategy to build physical stores is the opportunity for these to function as a showroom. In the last couple of years, Amazon invented some great products. But until now it was impossible to experience and discover these physically, unless they bought them. In the sense of marketing these stores functioning as showrooms would provide a huge upgrade for the presentation of products like “Kindle”, “Amazon Echo”, “Amazon Fire Phone”, “Amazon Fire TV Stick” and many more. Another incentive constitutes the grocery industry. Alone in the US this business represents $ 675 billion per year cf. (Kestenbaum, 2017). The grocery industry is a to big market to ignore and due to Amazon struggling successfully operating in that industry with their online channels, grocery stores would be the perfect solution.
The probably biggest driver of their strategic reorientation into physical store building is the fact that due to Amazon’s huge requirements in terms of their delivery services like “Same Day” delivery or the “Amazon Prime” service in order to satisfy their customers, caused intense increases in transportation costs cf. (Jesdanun, 2017). Therefore, in establishing physical stores Amazon anticipated that these stores can reduce the pressure of transportation requirements. Just if one third of their customers would regularly use physical stores as their shopping channel, this could mean a huge reduction of transport costs. Furthermore, no delivery is as fast as a customer, who picks up their products in a near located shop. All in all, physical Amazon stores would again relate back in increasing customer centricity through diversification, this time by providing their customers with the possibility to execute their shopping activities in physical stores.
2. “Business Development”
2.1. Between 2007 and early 2010, Amazon was already operating in a global environment. Their strategy was built on three fundamentals. Firstly, their global strategy was driven by broad diversification in terms of their product portfolio and target markets. Their products targeted markets in the US, UK, Germany, France, Japan, China and Canada, as shown in the following Table 1.
Table 1: Chronology of retail product globally rolled out across
Abbildung in dieser Leseprobe nicht enthalten
Source: Adopted from Morgan Stanley Technology Conference, 4 March 2009.
By attending these markets Amazon offered a broad and diversified product portfolio that reached everything from books, apparel, electronics and media to grocery, jewellery and automotive. At that time, they even newly implemented “Cloud Computing” and “Amazon Web Services” into their product portfolio, to address a total different customer base as they used to.
Furthermore, Amazon’s strategy is characterized by a strong customer centric approach, as stated in the case study. Jeff Bezos once said: “I ask our people to wake up afraid and terrified (about the customer) every morning.”, as quoted in the case study. This shows that their strategic approach is initiated from a top management level and not just wishful thinking, which strengthens their ambitions tremendously. Amazon’s customer-centricity is based on the three pillars selection, price and convenience. As stated earlier, the pillar “Selection” targets at offering the broadest variety of products reaching from simple retail products to Amazon’s software and “Cloud Computing” services. Moreover, their strategy includes their ambition to price leadership by simultaneously guaranteeing a consistent level of high quality among all their products and services. “Convenience” completes their “Three Pillar” strategy by putting the customer in the middle of all of their activities and processes. Particularly their high investments into innovations target at continuously improving customer satisfaction, as well inventing tools to capture and analyze customer data in order to increase their customer’s shopping experience. Their ambition to put the customer in the middle of all their actions is continuously driven and supported by innovation and investing in the future. This long-term investments and continuous R&D approach completes the fundamentals of Amazon. Their ambition to never stop innovating didn’t only lead to an increased customer understanding and satisfaction, it moreover ended up expanding their product portfolio by inventing innovative products like “Kindle”, “Amazon Web Services”, as well as their “Cloud Computing” services. Besides that, they were also able to decrease prices and reached cost leadership by decreasing operational costs through steady investments in technology. All this is initiated and driven by their innovative and ambitious leader, who once said: “When we plant a seed, it tends to take 5 to 7 years before it has a meaningful impact on the economics of the company.”, which points out their understanding to win big by falling short while going for the long run.