Strategic Position of Amazon.com Case

I. Strategic Position of Amazon.com

Amazon.com

            The US-based company Amazon is well known as the world’s biggest e-Retailer of books, head to head with Barnes and Noble for the title of the world’s largest bookstore, even though Amazon sells online only. From a start-up in 1995, annual sales have grown to more than billion and the company has 2.5 million customers – but reported its first profit only in2002. Other products include CDs and videos. The UK site (www.amazon.uk) was formed in 1998 by the takeover of Bookpages, and the UK is now Amazon’s biggest market outside the USA.

            Amazon.co.uk followed the US parent’s example of using heavy advertising to promote brand awareness. Traffic to the site is encouraged using the affiliate system. For example, popular search engines such as AltaVista offer links to books related to the key words. The site is user-friendly, enabling e-Shoppers to find books quickly by title, author or subject. Users can find their title in seconds from a few keywords. Synopses and contents lists are provided, along with a list of other relevant books. Amazon keeps a record of customers’ preferences and advises when new books likely to be of interest are published. One of the main selling propositions is a discount of up to 40 per cent – but such deep discounting made it hard for the company to reach profitability. Amazon is renowned for customer service, security and fast delivery (Dennis and Harris 2002).

            When customers buy something from Amazon.com, they can see the following statement; “Customers who bought this item also bought these items”. If a customer has a previous purchasing experience with Amazon.com, the company will support a ‘Welcome to Recommendations’ Web page. The personalized Web pages, vast selection of products, and low price lead customer loyalty and long-term relationship of Amazon.com. More than 20 million people have purchased at Amazon. Com. The percentage of returning customers is about 15 to 25 percent, compared with 3 to 5 percent for other e-business retailers.

            Amazon.com assembles large amounts of information on individual customer buying habits and personal information. Based on a customer’s previous purchases and Web surfing information, Amazon.com recommends books, CDs and other products. Sometimes a customer buys additional products because of this information. Through it ‘1-Click’ system, which stores personal information such as credit card number and shipping address, Amazon.com simplifies the customer buying process (Newell 2000 cited in Gray and Byun 2001).

 

SWOT Analysis

            SWOT (Strengths and Weaknesses, and Opportunities and Threats) is a basic analytical tool in management that has become popular in recent years. SWOT analysis is often used by strategic planners and top management in developing competitive strategies. It is typically used to decide corporate strategies and to make product or market level analyses (Reddy 1994). SWOT is a widely used thinking framework for identifying Strengths, Weaknesses, Opportunities and Threats. It enables key factors to be visibly recorded as a high-level summary of a business. SWOT analysis is a summary that is simple but powerful. It also enables a judgment to be made about aspects of the external business environment, which can affect the performance of the business, through looking at the Opportunities and Threats it faces in the wider world (Elkin 1998).

Strengths

• Reputation as the leading online retailer of media products that educate and entertain


• Highly diversified products


• Unique business model


• Innovative features such as Purchasing Circle and User Reviews


• Vast online-marketplace where users and customers can interact

Weaknesses

• The operation of Amazon.com is entirely reliant on technology. The company’s systems require constant maintenance and close monitoring.


• The company is greatly reliant on external delivery companies to carry out the delivery functions.

Opportunities

• Opportunity to develop relationships with publishers to offer exclusive editions and launch new authors


• Opportunity to increase the diversity of its product and service offerings


• Opportunity to expand in new markets and countries

Threats

• Intensifying competition from traditional stores that are also increasing their online presence


• Increasing transportation costs will directly impact delivery charges to customers


• General economic conditions will drive retail prices down and customer expectations for promotional deals will become a focus for all product areas

 

Porter’s Five Forces Analysis

            Porter identified the five forces model of competitive strategy. He identified the five forces as:

1. Competition among existing firms – this is the natural competitive rivalry, which exists between the various business operating within the industry market place.

2. Threat of new entrants – this is the potential likelihood of, and ease of, entry for new firm into the market.

3. Threat of substitute products or services – this is where a product or service, perhaps produced through a different technology, enters the market.

4. Bargaining power of suppliers – this examines the relationship between businesses in the industry and the suppliers to those businesses. Where the suppliers have a unique or restricted availability product they can exert a strong influence over process and conditions of supply, therefore potentially putting pressures on the businesses purchasing their product/services.

5. Bargaining power of buyers – this examines the relationship between businesses in the industry and the customers of those businesses. The purpose is to identify the relative strength of the business in the customer relationship (Elkin 1998).

 

 

II. Competitive Advantages

            Amazon.com emphasizes three things, which are very important to the customer. The first is ease of selection, the second is ease of use and the third is price. Typically, its books cost almost 40 to 50 percent less than those sold through traditional bookshops.

 

Business Model

            Amazon.com was founded on the notion that it could compete in the book retail business, and the form possesses all the positive qualitative aspects of a promising Internet business. As the first significant player on the Internet, it was at the forefront of a large and rapidly growing market. The competitive landscape at that time was also promising; investors’ confidence was very high and that confidence drove stock value up. Further, Amazon.com’s business model was relatively straight-forward and its site was designed for ease of use. Compared to traditional retailing, Amazon.com’s business model had string competitive advantages (purchase convenience, large variety of products, and price). Amazon also clearly secured the first-mover advantage (largest customer base and the best brand awareness in the book e-tailing business. In addition, Amazon’s business model was vary scalable, because it could easily expand its retail activity to other products such as CDs and videos (Sawhney et al 2002).

 

            The amazon.com business model assumes that the expanding number of Internet users will create a new mass market who value low prices and convenience and will shop for a large number of their needs using the computer. By removing the overheads of a traditional bricks-and-mortar store amazon.com is bale to reduce the cost of supplying a product to a customer and so charge lower prices (Reading 2004).

 

Management

            On the management side, amazon.com possesses a string team. The operating model focuses on serving customers, and the team has strategic vision and proven ability for execution. Jeff Bezos, founder and CEO, showed his vision and leadership by pushing the company’s concept and operations through various critical strategic phases, such as the diversification of e-tailing products and services. All key positions are held by experienced managers with proven track records in blue-chip companies (Sawhney et al 2002).

 

High Level of Assistance

            The strength of amazon.com is the high level of assistance that it gives its customers. It provides two important means of selecting an item. The first relates to selection by subject or category. It lists its books under different categories and the customer can then select and browse the category or subject he or she in interested in and determine if the book he or she is looking for is there. An alternative means, which is not available in the traditional bookshop, is that it allows a key word search facility, which picks out the books of interest using a search engine. 

 

Purchasing Circle

            Purchasing circle is an added feature to the amazon.com selection process. Here, information is analyzed by zip codes and by domain names for specific books and specific classes of users, and then a purchasing circle is created utilizing a technique called collaborative filtering. Therefore, one gets a group of customers who have a specific set of interest that can actually access a given purchasing circle. This allows one to display titles which may be of interest to purchasers within the purchasing circle and target special offers and reviews (Jurewicz and Cutler 2003).

 

Best-Seller Display

            Amazon.com also does what traditional bookstore does – displaying all the best-sellers at the outset. In order to aid the selection process, it utilizes a shopping cart where one actually selects items by just using ‘one click’ on the item, and this is automatically added to the shopping cart. When one has finally completed the selection of items, one can proceed to order creation and order submission.

 

Continuous Introduction of Innovative Features

            Over the years, amazon.com has gradually added more and more features that provide visitors with information about the items that interest them. In the ‘Product Detail’ section for a book, customers will find publishing information, the book’s amazon.com sales rank, the average customer review, and the various amazon.com ‘Buyers Circle’ groups where this books is selling well. By scrolling down the screen, the customer can see a selection of editorial reviews: Amazon’s own review of the book, plus reviews from Publisher’s Weekly and other major publications. Another special feature allows visitors to recommend another book in addition to-or instead of-the book currently being viewed. From the early days on, amazon.com has encouraged user feedback and community development. Customer reviews are an important part of this policy. Anyone who is registered user of Amazon can write a review of a book or other item. The customer can also provide information about their selves and list the reviews they have written. In this well-developed online community, customers can have a lively exchange of opinion about the books, music, and other items that they buy. To approximate the in-store book-browsing experience, amazon.com created the ingenious ‘Look Inside This Book’ feature which enables customers to view actual pages from the printed book. This feature provides the closest possible online approximation of picking up the book in a bookstore and flipping through it. The customers can read endorsements on the back cover, scan the table of contents and the index, and read a few pages to get the flavor of the writing (Schmitt 2003).

 

Diversification

            Diversification involves moving simultaneously into new products and new markets. It is a risky strategy but with careful selection of the right kind of businesses, considerable improvements in profitability can be experienced. Diversification can take place into related or unrelated products. A related diversification is one in which the new business has meaningful commonalities with the core business. These provide potential to generate economies of scale or synergies based on exchange of skills and resources. A diversification strategy can be implemented by an acquisition (or merger), new business venture or strategic alliance (Proctor 2000).

            Even though amazon.com started by specializing in books, it did not pick out  a special segment of the book market unlike other stores. While amazon.com started as a specialized store concentrating totally on books, it has moved into several other areas and now includes a wide variety of items such as CDs, electronic goods, DVDs, computer games, and videos (Chan et al 2001).

 

Supply Chain Management

            One of the contributors to the success of amazon.com is its ability to enhance relationships across the supply chain. Customers, authors, publishers and distributors all contribute to the increasing bank of in-house and market information required to respond to requests from customers. Customers include those who purchase books, publishers who request market information and book resellers who also rely on amazon.com services. The former constitutes business-to-consumer (B2C) e-commerce whereas the latter two are business-to-business (B2B) e-commerce (Combe 2006).

            From the consumers’ point of view, amazon.com is characterized by the user friendliness of its Web presence and a visible orientation towards customer requirements. This takes place largely on the basis of the information collected during the relationship with the customer. After a customer has searched for a given book title, amazon.com will propose alternative titles based on previous purchases: the consumer is given a list of all the books which other consumers have purchased along with the chosen title. By processing information, amazon.com changes the supply chain from the publishers via the bookshops through the consumers. Amazon.com only orders books from the publishers on the on the basis of confirmed orders received from consumers. The only books in which amazon.com stocks are the top 200 in the best seller list (Osterle et al 2001).

 

III. Recommendations

            The recommendations for amazon.com focuses on Customer Relationship Management (CRM).

 

The overall processes and applications of CRM are based on the following basic principles.

• Treat Customer Individually – Remember customers and treat them individually. CRM is based on philosophy of personalization. Personalization means ‘content and services’ to customer should be designed based on customer preferences and behavior (Hagen 1999 cited in Gray and Byun 2001). Personalization creates convenience to the customer.


• Acquire and Retain Customer Loyalty through Personal Relationship – Once personalization takes place, a company needs to sustain relationships with the customer. Continuous contacts with the customer – especially when designed to meet customer preferences – can create customer loyalty (Gray and Byun 2001).


• Select Good Customer based on Lifetime Value – Find and keep right customers who generate the most profits. Through differentiation, a company can allocate its limited resources to obtain better returns (Gray and Byun 2001).

 

            Customer relationship management is its broadest sense simply means managing all customer interactions. In practice, this requires using information about the customers and prospects to more effectively interact with the customers in all stages of the organization’s relationship with them (customer life cycle). The stages of customer life cycle are:

• Acquiring customers – The first step in CRM is to identify prospects and convert them to customers. CRM helps organizations to better understand their customer’s needs.


• Increasing the value of the customer – Personalization is the key to increasing the value of the product or service of the customer.


• Retaining good customers – The cost of acquiring a new customer exceeds the cost of keeping good customers.

 

 

 

References

 

Chan, H, Lee, R and Tharam, D 2001, E-Commerce: Fundamentals and Applications, John Wiley and Sons, New York.

 

Combe, C 2006, Introduction to E-business: Management and Strategy, Butterworth-Heinemann

 

Dennis, C & Harris, L 2002, Marketing the E-Business, Routledge, London.

 

Elkin, P 1998, Mastering Business Planning and Strategy: The Power of Strategic Thinking, Thorogood, London.

 

Gray, P and Byun, J 2001, Center for Research on Information Technology and Organizations: University of California, viewed 06 March, 2009, <http://www.crito.uci.edu/publications/pdf/crm.pdf>.

 

Jurewicz. L and Cutler, T 2003, High Tech, High Touch: Library Customer Service Through Technology, American Library Association.

 

Newell, F 2000, Loyalty.com: Customer Relationship Management in the New Era of Internet Marketing, McGraw-Hill, New York.

 

Osterle, H, Fleisch, E and Alt, R 2001, Business Networking: Shaping Collaboration Between Enterprises, Springer.

 

Reading, C 2004, Strategic Business Planning: A Dynamic System for Improving Performance & Competitive Advantage, Kogan Page.

 

Reddy, A C 1994, Total Quality Marketing: The Key to Regaining Market Shares,

Quorum Books, Westport CT.

 

Sawhney, M, Gulati, R, and Paoni, A 2002, TechVenture: New Rules on Value and Profit from Silicon Valley, John Wiley and Sons.

 

Schmitt, B H 2003, Customer Experience Management: A Revolutionary Approach to Connecting with Your Customers, John Wiley and Sons, Hoboken, NJ.

 

 

 

 

 

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