STRAMA: AMAZON CASE ANALYSIS- ESSAY SOLUTION

STRAMA: AMAZON CASE ANALYSIS- ESSAY SOLUTION

(2583 Words)

 

Introduction

Amazon has the first mover advantage in online bookselling industry.  In the onset of 2004, it is named to be number one in on-line service, has six website servers, 32 million customers in 150 countries, 900,000 associate programmes linking up or having contents of Amazon.  However, it can influence the general and industry environment (a possible strength/ weakness creation) or be influenced in return (a possible opportunity/ threat eruption).  Its objective then should not be strictly based on competitive action and responses implementing its mainstream strategic plot of expansion through customer innovation. This paper presents PEST and Five Forces Analysis, internal resource audit, value chain analysis and core competency identification of Amazon.  It will show why the firm needs to modify and adapt its strategic outlook relative to its environment and internal resource and capabilities.

 

PEST Analysis

Although internet security and systems have improved, the wide inequality of technology distribution in the global arena undermines the endeavors of technology- and innovation-based firms like Amazon.  Apparently, sales of these companies will be limited to the top 20 countries that posted an average of at least 50% of internet penetration against the bottom 200 of less than 5%.  The more-or-less 90% of global population without internet access is aggravated by the top 20’s similar condition although prospects for the latter of becoming potential on-line customers are definitely higher than the bottom 200.

Further, building the technological environment for the bottom 200 could be a relatively easier national concern than building the necessary human capital to facilitate and use such infrastructure.  This fact goes beyond the budget limitation of institutional segments (government, businesspeople, and academic foundations) and requires subsequent, if not preceding, popular culture approval.  The less tolerant cultures like that of Chinese to Western aspirations is an example of e-commerce challenge belittling the power of technology against the rule of cultural supremacy that is conservative of modernism uncertainty that could attack political and cultural beliefs of local population.

 

Finally, the importance of technological education for both customers and businesses is an indispensable platform required to augment internet penetration and socio-political resolutions.  Amazon’s case charges against email forgeries in 2001 and 2002 implied the adversary effects of e-commerce to consumers and legal services providers alike including the government’s capacity to earn.  With incentive to learn the technology skewed to profit-based opportunists, legitimate benefits attributable to core stakeholders will only be sub-optimal and could ultimately pilot to discourage customer reliance on online shopping leading to unnecessary costs accruing to technology providers (litigation, advertisements) and government (monitoring).

 

In the less internet penetrated countries, foreign direct investments not simply portfolio capital is needed to stimulate the demand for e-commerce at a significant level.  This move would be limited to open countries while close countries could be approached through amplified political relationships, possibly trade pacts.  At the end, strong governmental lobbying favoring the technology-based industry or pre-determined national priority to modernizing key institutions are supporting conditions to initially deploy rational market segmentation to underdeveloped and developing nations.  Seeing technology diffusion initiated by political hierarchies is more dependable pre-condition than relying on the citizen-driven model of demand because it has the ability to relax religious and cultural ideologies at the face of developmental and economic issues towards a sustainable national dominance theory.

 

Five Forces Analysis

This analysis is more direct to the firm than PEST factors since the intensity of industry competition and profit potential is a relative direct factor of industry analysis observed in five forces; namely, threat of new entrants, bargaining power of suppliers, bargaining power of buyers, threat of substitute products, and intensity of rivalry among competitors.

 

Threat of entry is considered medium to low.  Being the first mover in online bookstore industry, Amazon would be the best example of what amateur firms would be faced.  The factor that separates Amazon from the inexperienced firms is its 8-year capital intensive and continuous upgrade of services through acquisitions and alliances, nurturing the commission-based associate websites, and endless technology development and innovation.  Imitating such would also require relationship building which is difficult when relationship is already established by the first mover, or in the case of untapped technology partners, requires significant capital and strategic plan proposals to move the other party.  In both cases, known industry players would be the benchmark requiring the deal a considerable amount of time and money impractical for the new player.

 

However, switching costs is moderate for customers giving a breathing space for niche players like eBay to exploit auctioning markets or Wal-Mart to merely use their website to highlight real shopping experience at affordable prices.  This fact bestows Amazon untapped and low-valued niche market available to small players accompanied with sub-optimal but effective (that is, operating under positive results) earnings from the industry entire e-commerce market.  Also, expected retaliation from these niche competitors is likely to happen when the diversified Amazon poised threat of the former treasured small market share.  The diversity of products and markets in the industry give niche players an enforceable claim over the moderately to un-served market base over diversified industry players like Amazon.

 

Supplier’s power, buyer’s power and threat of substitutes are low.  Since retail industry has a minute 1.5% online sales, industry firms have an upper hand over retailers offering the former technology and internet presence to the latter untapped global exposure.  This made e-commerce firms significant customers to suppliers particularly the ones who have global marketable products/ services.  Except for B2B transactions (like Target commissioning Amazon’s technology), customers both merchants and pure buyers using industry technology are independent and geographically segregated from each other that makes their individual purchase insignificant to firms while their web-based purchase decisions are supported by firms’ convenient and general-to-rare product shopping at discounted prices and delivery options.  These made their switching costs expensive while oftentimes diminished their ability to purchase the needed item at times when decisions are delayed.  As a result, threat of substitutes become a sub-optimal, if not, infeasible alternative.

 

Lastly, competitive rivalry is medium to high.  There are numerous industry players; however, they can be considered niche (eBay) and overly diversified (Yahoo!) competitors of a diversified industry firm like Amazon.  As a result, a head-to-head competition exists against Barneys (who is backed by retail stores) and Price line (who has the highest employee per revenue contribution in the industry) created strategic group together with Amazon.  Adding the flame of intensified rivalry is the high fixed and storage costs of the industry since firms needed to stock inventory in their warehouses for ready delivery of an order.  Competitors also have little product differentiation, except for auctioned product maybe and other exclusive rights of players to sell supplier’s products, making customer switching costs low.

 

Entry to the industry will continue to lure small players to target a certain niche although large entrants would likely resort to unsolicited take-over of existing diversified firms like Amazon or slowly identifying and creating partnerships with web-based giant firms like Yahoo! or Google to realize industry position.  The supply chain actors and substitute products are derailed by the power and convenience of online shopping making the associated costs of outside the industry transactions crucial to their profit and satisfaction levels.  This vital border line between efficient and non-efficient transactions builds industry diversified players with numerous niche competitors competent of acquiring a huge pie in their profits because of their customized service in addition to intense rivalry in mainstream diversified industry wherein both long- and short-term strategies are considered equally value-creating activities.

 

Internal Resource Audit        

Amazon has high ability to generate internal funds as showed by its cash equivalent of $133M in 2001 to $822M in 2002 most possibly from cost cutting activities that includes downsizing and inefficient distribution/ warehouse closures.  However, it also has also invested to partnerships in Dell and other auction houses that could result to gains for the company although its borrowing capacity through public offering seems sub-optimal primarily because of the uncertainty of technological advancements that makes shareholders key financer of Amazon’s innovation and acquisition endeavors.  In relation to financial resources, patents and stock of technology not only gives the firm 20% share of web development from total revenues (additional internal fund generation) but also competitive advantage of one-click technology from Apple to back-up its browsing and searching convenience promise to customers.

 

The best thing about innovation culture in the firm is that the founder CEO          maintains and flames it.  Thus, the process of keeping the learning- curve even at rough times and stock price falls created a reputation of customer-focused innovation to increase convenience protected in its 8-year existence, rooted in its 1995 infancy and stored in the heart of the CEO since his 14th birthday.  The innovation culture is enhanced by recruiting top executives who have thorough experience and knowledge in areas of supply chain management, logistics and international relations to support geographic expansion of markets in Canada, Japan and France wherein 2003 figures showed 37% share on revenues of countries outside North America.

 

Value Chain Analysis

Primary activities such as inbound logistics is thoroughly supported by secondary activities such as selective procurement and technological development that can filter the choice of product/ service from retailers/ manufacturers for customers to have safe transactions.  In addition, its firm infrastructure allows its operations and marketing to be compressed in one commission-based scheme provided to its 900,000 and growing associate partners.  Further, its infrastructure also allows its Seattle headquarters to minimize tax payments not to mention the strategic outbound logistics of the Delaware center that enabled the inventories closer to East country markets like Japan and other European countries.  As a result, the value chain combines the relatively low-cost and supportive environment of Seattle headquarters that houses technology developers while creating efficient procurement, storing and delivery products through closing of inefficient warehouses and opening strategic and value-adding ones.

 

Resource and Competencies     

Unique to Amazon is its patent-protected software technology.  This resource would surpass industry standards with benefit of securing the right to exclusively use and sell the developed innovation.  Other close-rival firms may have strategic and innovative-like leaders such as       or executives with experience and knowledge of the industry but the value-adding capability that it can offer to customers would be amputated, if not, eradicated for use due to legal constraints.  In a similar manner, large firms wanting to enter the industry would have large capital base and shareholder or public financing capable of pirating Amazon key employees or buying close competitors.  However, without buying the whole company such seemingly unethical would not injure the competitive advantage of Amazon much because patents do not accrue to individual employees rather the company.  As a result, stagnation (diminishing firm’s value) or over-complexity of technology (higher costs) would be the long-term position of imitating rivals.

The most prominent core competency of the firm would be its strategic plot of expansion though customer innovation.  It has the costly-to-imitate financial and technological resource, valuable firm infrastructure, rare strategic leader and top management composition and non-substitutable software technology.  These resource and capability combinations that possess the four criteria (although may have two or more realized criteria) suggest that sustained competitive advantage is present to the firm’s patented innovation.

 

Conclusion

Opportunities lies in the further modernization of retail sector and realization of global markets particularly those in top 20 of the efficiency, convenience and diversity of e-commerce.  Threats are identifiable in bottom 200’s cultural and political boldness that would take decades of ideology cycle, perhaps, long-term negative economic recession due to failure of market actors to use and exploit available resources efficiently.  Strengths of patented software innovations would give the firm sustained competitive advantage that can leverage long-run internet penetration of untapped global markets.  However, weakness on niche competition would ultimately carry with it more valuable competencies due to focus strategies that would possibly be applied to win a share in certain markets.

 

Due to these findings, Amazon should be selective in expanding its product line through expensive acquisitions.  A more fitting strategy would be expanding its market base to include developing countries that have bright prospects in embracing information technology at the fore, and subsequently, e-commerce.  It could advance initial development feats to these countries by establishing test areas and hands-on experience to prove the advantages of e-commerce.  The host government should be closely coordinated to achieve positive, supportive and multiplier results.  In effect, the core competency of its strategic plot would be modified to expansion through customer innovation and adaptation.

 

Appendices

 

1995 -1996 – start up notification and other updates on books, launching of associate programme, private funding to expansion, warning of volatile environment, 151 employees

 

1997 – two years of non-competition ceased with Barneys and Noble support to existing shops, reached 1 million customers in 150 countries, 15,000 associate website, one-click order processing, 614 employees, recruit top executives from other companies, customer-customer and editor-customer recommendation, 20-40% of on books triggering repeat online purchasing, intense promotional relationships with Yahoo, AOL and other portals (exclusive book/ primer only)

 

1998 – 6.2 million customers, 60,000 members, launched music, video and gift stores, expanded in UK and Germany, repeat customers 64% of sales, 2,100 employees, continuous executive management fill-ups those with international exposure and heavily experienced ( 25 years in logistics mngt), launching of Amazon Advantage (publisher’s advantage) and Amazon.com Kids, building of strategic acquisitions and relationships, installation of              , promoted on Quicken software, acquired largest online bookstores of Germany and UK, internet movie database,          (e-commerce upgrade); additional distribution and customer service center in Nevada and UK and Germany, CDs and Video sales, received awards

 

1999 – 17 million customers, 7,600 employees, 430,000 members, another executive hiring, toys and game offer, Amazon Advantage for customers is launched, z-Shops, auction, cards, anywhere, intensify partnership of Dell, drugstore, sporting goods, pets, auction houses upgrade, provider of rare books with the same view on customer value through selection, service, convenience and community, increase the number of distribution centers, man-of-the-year and subsequent company awards.

 

2000 – 9,000 employees, stock value dropped significantly, 20 million customers, 530,000 members, cutting costs due to tech wreck the diminish shareholder’s value, “customer-centric” view despite technology bubble, WAP introduction, Amazon France and Japan, Apple one-click patent, computer and video games, installment payment scheme, kitchen, home-living and car, hired internet VP      ,  (luxury) and eZiba (handcraft products) investments,

 

2001 – 700,000 members, international net sales triple increases 25% company sales, 25 million customers, larger cost-cutting, reduction employees by 1,200, closed Georgia, Seattle and Netherlands warehouse, electronic and kitchen products increase, interactive existing orders, book preview, Amazon Access for visually impaired, Amazon virtual credit card, Marketplace used products, first time looses reduced and profits grew, highest quarter sales at $1B, “balance of growth and cost improvements”.

 

20002 – strategy is to offer experience at lowest possible costs, first annual profit (modest), 35% of sales outside US, stock price constant, some resignation in top management and board, 7,500 employees, 32M customers, Amazon Canada, 900,000 members, web developers incentive to use some of Amazons patented program features into their websites, Apparel and accessories, Target being a customer of Amazons technology, renewal of strategic relationships and investments, other international websites include the Marketplace technology of mother system, lawsuit to Barneys and Nobles (1999) illegal use of one-click patent, email forgeries lawsuits, customer satisfaction award

 

2003 – free-shipping and lower prices, inception of talented and experienced executives, US postal service and Fedex team-up to Harry Potter edition, extension of Target partnership in 2008, culinary, basketball stores NBA and WNBA, spoofing remedy limited in Canada and US.  37% sales outside US, 20% used items