Module Title: Business Strategy
Date Due: 15th June 2009
Question 1:
Analyse Amazon’s business model in its early years.
Amazon.com is a United States-based multinational e-commerce company (Wikipedia.com, 2009). In this question, we will analyse business model of Amazon.com in its early year, from 1995 to 2000.
Business model is a mechanism intended to designate a business value proposition or value of the target customer base, financial models and market offering (Rayport, 2002). This is a summary of how the company plans to provide customer service, and to identify their products (Chaffey 2003).
Amazon.com was being established, the transfer information, goods, or services to end customers to use a strong business model 'Online Retailers of Physical Goods'. This kind of business model’s property rights and new production's product that they sell, often relies on the third party provides (School of International Business, Qut, 2004). Like Amazon.com, it needs third party providers, for example Borders and Barnes & Noble to maintain its enough supply (Jason, 2004).
The strategies that Amazon.com operates to enhance it competitive advantage are cost-leadership, customer differentiation and focus strategies. The cost-leadership is pursued by Amazon.com through to differentiating its basis price. Customer differentiation is the second strategy, Amazon.com to provide current and potential customers differentiation of design, quality or convenience and Amazon.com always choose a differentiator that is different among the competitor. The focus strategy is consider one of the first two strategies and applies it to a niche inside the market (Saunders, 2001, pp.122-123).
Values also play an important role in Amazon.com success. The two strong values that practiced by Amazon.com are customer satisfaction and operational frugality. These two values accompaniment Amazon.com's outfitted strategy in achieve and maintain an effective competitive advantage and encouraging employee and corporate performance (Saunders, 2001).
According to Jason (2004) technology focus, distribution focus, customer and product focus are the four primary drivers for growth of Amazon.com at the first five years.
For technology focus, Amazon.com attempts to use technology to solve real problems, (Jason, 2004) such as security issues and purchasing these somewhat “intangible” products (Bianco, 1997). Now, technology has been used for easy ordering (e.g. One-Click System), securing customer credit card numbers, speeding delivery and new and exciting offerings that draw people to check it out (Jason, 2004). Amazon has always been committed to technology and its software. It allowed it to position itself as major online retailers (Geiss et al, 2005).
About distribution focus, Amazon.com tries to expand its business, so it needs to expand its products’ distribution (Jason, 2004). It expended operations in to UK, Germany and France in 1998 and 2000(Johnson and Schole, 2002), (Johnson et al, 2007). It set up distributor centre in other countries’ retailer website to increase the speed of delivery (Johnson and Schole, 2002).
In order to satisfy customers needs and make it can interest by customers Amazon.com not only expand its products category (Johnson and Schole, 2002), (Jason, 2004) it also instilled into the retail sales elder's tradition "one-on-one" with customers through their technical software to enable them to provide personalized customer interactions, like personal recommendations (Bianco, 1997).
Consistent with Johnson and Schole (2002) at the first five years Amazon.com's strategic focus has remained on the customer. The critical components that Amazon.com provide include browse, search for review and content, recommendation and personalization, 1-Click technology, security credit card payments, and sexual and perform.
Question 2:
Evaluate how Amazon grew over the period 1995-2003.
Amazon.com is a United States-based multinational e-commerce company. It is the largest U.S. online retailers. In 1994 Jeff Bezos founded Amazon.com, he launched it online in 1995 (Wikipedia.com, 2009).
According to Johnson and Schole (2002) the cumulative customers of Amazon.com is continue increase from 1997 year by year. Consistent with Rayport and Jaworski (2002), Johnson and Schole (2002), Johnson et al (2007), Amazon.com (2002) and Amazon.com (2003) net sales of Amazon.com also continue increase year by year, but it had still suffered the operating loss from 1995 to 1999 (Johnson and Schole, 2002), (Rayport and Jaworski, 2002). The operating loss starting decreased from 2000 to 2003 (Amazon.com, 2001), (Business Wire, 2002), (Amazon.com, 2002). Amazon.com starting got operating income in 2003 (Amazon.com, 2003).
The reason of Amazon.com’s revenue grows rapid from 1995 to 1996 (Rayport and Jaworski, 2002) because it was no significant rivals. It was recognized the large and best internet bookstore within one year (Johnson and Schole, 2002). Johnson and Schole (2002) expressed that Amazon.com approved numerous milestones in 1997 because its net sales increased eight-fold (Rayport and Jaworski, 2002).In 1997, Amazon.com provided the lowest book price. In 1998, Amazon.com launched music, video and gift stores, twenty-five percent of sales for 1998 were derived from it. In 1999, it launched new product and service to enlarge the selection of toys and games (Johnson and Schole, 2002). In 2000, it launched kitchen and house wares. It launched magazines in 2001. It launched office product, apparel and accessories in 2002. In 2003, it launched sport tools, gourmet food, jewellery, watches and personal care product (Johnson et al, 2007). The new products were attracting more customers there is why the cumulative customers and net sales of Amazon.com were increasing year by year. Beside that, Amazon.com provided the formidable search tools facility and series of services do not provide by other online competitors, provided new features and service which is not accessible in other online or physical stores, continue extend Associate Websites in different countries (Johnson and Schole, 2002), and free shipping and low prices (Amazon.com, 2003) also is the important element.
The main reason that Amazon.com can be success to grow over between 1995-2003 is they provide value add to customers (Robert, 2000), Amazon.com not only provides various products it also provides various service to customers. Along with Business Wire (2002) and Robert (2000) work hard to lower price, customer focus, facilities and services is the key of Amazon.com to provide value add to it customers. Beside that, Amazon.com also spent a lot of cost to merger, acquisition and investment-related costs in order to provide more value adds to customers (Amazon.com, 1999). There is why Amazon.com will suffer the operating loss in beginning (Johnson and Schole, 2002), (Rayport and Jaworski, 2002).
Question 3:
Examine the basis of Amazon’s competitive advantage.
Competitive advantage is a special kind of way. It can let an organization get more benefit than its competitors in the market (Investopedia.com, 2009). In term of resource-based view, in order to develop a competitive advantage, the company must have resources and competences are superior to its competitors. Resources are firm-specific assets useful for creating cost or differentiation advantages (Quickmba.com, 2007). According to Johnson et al (2007) “competences are the skills and abilities by which resources are deployed effectively through an organization’s activities and processes”.
Consistent with Hitt et al (2007) the competitive advantage of Amazon.com include a huge range of goods and services, a well-known brand names around the world, a website is very simple to understand and browse, reputation for dependability, and expansion into new area (e.g. Web-search service). Technology innovations are the source of this advantage.
Along with Trepper (2000) Amazon.com able to personalize a customer’s shopping experience and manage its relationship with customers is because of it personalized recommendations.
In accordance with Johnson et al (2007) Amazon.com can operate with low cost because of Amazon.com did not have the high overhead of a bricks and mortar retailer.
According to Sandeep (2003) Amazon.com able to offer shopping convenience, ease of purchase, speed, decision-enabling information, a wide selection, discounted pricing, and reliability of order fulfilment is because Amazon.com has a good logistical competencies.
Amazon.com can provide a wide choice to customers by low price and receives great discounts from suppliers is because it purchasing large volumes of products directly from publishers (Sandeep, 2003).
Direct model let Amazon.com able to shorten it shipping times, beside that Amazon.com also invested heavily in warehousing and material handling systems to accomplish multiword improvement in throughput (Sandeep, 2003).
In proportion to Schoettler (2006) centralized distribution model enable Amazon.com to manage inventory much more efficiently than traditional retailers. Amazon.com sells its whole inventory every 25 days but Best Buy (NYSE: BBY) need to takes 60 days
In term of Johnson and Schole (2002) Amazon.com get a strength management because of it was recruiting some experts. For example, in 1997, Amazon.com recruited Richard Dalzell, a former Wal-Mart vice-president as chief information officer. In 1999 Amazon.com was recruited Warren C. Jenson as its senior vice-president and chief financial officer. Jenson had been supervisory vice-president and CFO at Deltra Airlines.
The strategies that Amazon.com operates to enhance it competitive advantage are cost-leadership, customer differentiation and focus strategies. The cost-leadership is pursued by Amazon.com through to differentiating its basis price. Because of this strategy, Amaon.com always ensure that it provide the same quality products as other companies by lower prices. Customer differentiation is the second strategy, Amazon.com to provide current and potential customers differentiation of design, quality or convenience and Amazon.com always choose a differentiator that is different among the competitor. Therefore Amazon.com customers can identify and make different its product from competitors. The last one is focus strategy. This strategy is consider one of the first two strategies and applies it to a niche inside the market (Saunders, 2001, pp.122-123).
Question 4:
What challenges does Amazon face at the end of the case?
Jeff Bezos hope Amazon.com can became a place which for customers to find almost everything they want - whether it is Amazon itself sell products or simply takes a cut from other merchants selling on its Web site (Bezos, 1999). Now, customers can purchase many items from Amazon.com, but because of the rapidly changing electronics market, in Amzon.com the number of products in the sale is not enough. In 2002, there were a few million new customers on the network, which helped to strengthen these sales, the majority of sales come from the people that have been online shopping, that love the convenience of it, want to stay away from shopping malls, took advantage of free shipping promotions and spend more money shopping in online than in 2001 (Interview, 2002). Therefore, retaining customers is very important to the future of Amazon.com. Amazon.com will establish strategies to maintain its customers. Customer demand in future will be more convenient and privacy (Krishnamurthy, 2003).
Amazon.com needs to start using the network to improve the production and distribution. The multi-channel retail sales in the future will be a criterion. Amazon.com will establish partnerships with bricks and mortar retailers. The number of companies will be taking the bricks and clicks approach will increase and online shopping will be regarded as a channel for collecting information (Krishnamurthy, 2003). Customers shop at stores that they belief and like. Therefore, the brand strength will be crucial in this sector. Amazon.com brand unique is its greatest strength. Amazon.com tried to occupy the off-line competitors from their market share. Prices reduction and free shipping are continue to help Amazon.com to sustaining its competitive advantage and maintain its market share (Spann et al, 2004).
Amazon.com has made it clear, and has shown admirable enterprises can speed the growth of the internet environment (De Kare-Silver, 1998). Amazon's failure, success and achievement have a profound impact on almost every sector of business in the world (Spector, 2000). Therefore, through their own actions and their own tests, Amazon.com has set up a model for the future of online retailers, to track and test themselves (Spann et al, 2004).
Amazon.com sustain operation loss because of it provide many products and service by low price and good quality. For this Bezos felt that it is doesn’t matter because he is aim to make Amazon.com success along the three proportions of strategy which can position Amazon.com for long-term success: expand Amazon.com's brand position in the online world; provide excellent value to customers through the excellent online shopping experience, and achieved significant sales in order to achieve economies of scale. Bezos state that he will continue to invest at more and more insistent rates as long as we continue to be success. He will stop spending large amount of money to invest on marketing expense when Amazon.com unable to get new customers and introduce Amazon.com to new customers in a cost-effective way Rayport and Jaworski (2002).
In 1999, Wal-Mart shaped a strategic alliance with Books-A-Million, the third largest book retail chain in the United States. The product that Wal-Mart sells in online includes books, music, appliances and toys. Many people forecast that this transaction will greatly enhance the base of the title of Wal-Mart, so Wal-Mart can be a direct threat to the market share of book sales, such as Amazon.com, barnesandnoble.com and Borders (Wang and Hollander, 1999). But in real world, Amazon.com rated as the 57th most important brand worldwide in 1999 (Johnson and Schole, 2002). According to Johnson and Schole (2002) the cumulative customers of Amazon.com is continue increase from 1997 year by year. Consistent with Rayport and Jaworski (2002), Johnson and Schole (2002), Johnson et al (2007), Amazon.com (2002) and Amazon.com (2003) net sales of Amazon.com also continue increase year by year. Therefore, although Wal-Mart sells latest bestsellers online, it also can not direct threat to the market share of book sales of Amazon.com.
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