1. 2013AMAZONPUJA MISHRA[BUSINESS STRATEGY - AMAZON]The document details the strategy of Amazon, analyses its resources and capabilities, competitionand finally provides recommendation for the growth of Amazon
2. Executive Summary:IntroductionAmazon is the world´s largest online retailer. It is also known as the Wal-Mart of the web.According to Amazon´s annual report, Amazon´s revenue is approximately $61.09 billion (2012).Today, it probably ranks as the leader in terms of the richness of its e-commerce features, productbreadth, personalized recommendations and depth of content available across the e-commercesites.Competitive positionsAmazon´s e-commerce business model is stronger than other e-commerce business models.Exhibit 1 shows Amazon´s revenue and market share from 2010 to 2012. Exhibit 2 shows themajor competitors within each strategic group. Major competitors of Amazon are (i) All physical-world retailers, publishers, vendors, distributors, manufacturers, other online e-commerce andmobile e-commerce sites including sites that sell or distribute digital content. (ii) Number ofindirect competitors including media companies, web portals, comparison shopping websites andweb search engines either directly or indirectly or in collaboration with other retailers. (iii)Companies that provide e-commerce services including website development, fulfillment andcustomer service. (iv)Companies that design, manufacture, market or sell digital media devices.They compete with their competitors by offering the lowest price on the products (because ofeconomies of scale) and providing the best quality of customer service and convenience to itscustomers which other physical stores or websites may not be able to offer. Barriers to entry isless significant because Amazon can afford to offer lower prices with its economies of scale, astart-up may need to charge slightly high prices.Competitive Forces and Environmental FactorsExhibit 3 shows the five competitive forces of Amazon´s. Exhibit 4 shows the environmentalfactors which have been affecting Amazon. However, there are other factors which have beenaffecting Amazon from long time such as :Risk related to system interruption and redundancy- They occasionally experience systeminterruption and delays that make their websites and services unavailable or slow to respond,which may reduce their net sales and attractiveness of products and services. Communicationssystem and operations could be damaged by fire, power loss, flood, computer virus. Any of theseevents could damage Amazon´s reputation.Loss of key senior management personnel could negatively harm Amazon´s business- Theydepend on senior management and loss of any senior key employees such as president, CEO andchairman could harm Amazon business.
3. Payment related risks- They rely on third parties to provide payment processing services,including the processing of credit cards, debit cards, electronic checks, and promotional financingand it could disrupt their business if these companies become unwilling or unable to provideservices. If their data security systems are breached or compromised they may be liable for cardsissuing banks cost, subject to fines and higher transaction fees and lose their ability to acceptcredit card and debit card payments from customers, process electronic fund transfer, or facilitateother types of online payments and Amazon´s business and operating results could be affected.Capabilities Analysis of AmazonAmazon´s capabilities are well positioned for market growth. Exhibit 5 shows capability analysis.As Amazon is a large buyer of products and can afford to offer lower prices with its economies ofscale, it would be extremely difficult for the incumbents/new entrants to imitate. Maintaining andimproving operational efficiencies is the key to sustainable competitive advantage of Amazon. Theability to offer shopping convenience, ease of purchase, speed, decision enabling information,wide selection, discounted pricing and reliability of order fulfillment are all tied directly tocompany´s logistical competencies.Recommendations:Customize locally: In emerging markets such as India, Amazon can expand by offeringother modes of payment like cash on delivery. To increase sales and profitability inemerging market such as India Amazon would have to reach out with cash on deliveryservice1. The cash on delivery model could be of great significance since credit card andnet banking penetration is very low in India. The online payment systems are not verymature. This deters people and they are more comfortable with paying cash on deliveryInnovation: Amazon needs to compete with local players, big giants such as apple,walmart etc. Hence, Amazon needs to invest in R&D and launch new productsExcess returns: Amazon’s ROE is negative. That implies that its unable to attain its cost ofequity. If this is temporary due to Amazons strategy of lower margins, its fine but it has toearn excess returns in order to have positive growth.1http://articles.economictimes.indiatimes.com/2012-09-03/news/33563434_1_debit-card-sector-banks-credit-cardshttp://articles.economictimes.indiatimes.com/2011-07-13/news/29769249_1_cards-portfolio-credit-cards-card-usage
5. Exhibit: 2Competitive Analysis of Amazon:Analysis:Based on the competitor information sheet, I conclude the following:Valuation: Apple seems to be the most valuable company among all. However Apple is acompetitor in just one segment i.e. Ipad vs Kindle. Hence it may not be relevant to directlycompare Amazon with its value but it does give an idea that if the competition is sovaluable and big, it could pose challenges in the future. In strategic group 2, Walmartseems to be the most valuable company at $312.88B followed by Amazon.R&D: The R&D expenses for Amazon are zero which is bit surprising given the fact thatAmazon intends to compete with Apple in Kindle vs Ipad category. As apple invests a lot inR&D and delivers new products every 6 months, I think that Amazon also has to invest andcome out with new products should it want to compete with Apple.ROE: The ROE of Amazon seems to be lower than all its competitors in all strategic groupexcept that of Barnes and Noble and Sears. Assuming that the cost of equity to be thesame for all the companies in strategic groups i.e. 8%2, Amazon seems to be not able to2Risk free rate = 2%( US treasury bond), Beta = 0.83 ( yahoo finance), Risk premium =7%. Assumed that therisk premium will be around 7% on an average
6. earn excess returns. This could be the result of short and long term strategies of Amazon.As discussed in the New York Times, Amazon is planning for long term strategy byproviding kindle at lower prices in order to generate the user base and then use it for longterm advantageROA: Amazon has poor ROA in comparison to all its competitors except Barnes and nobleand Sears. This implies that Amazon is not able to effectively utilize its assetsRevenues: Among online shopping strategic groups, Amazon seems to be the leaderexcept Walmart that has more revenues. However, it includes revenues from both onlineand brick and mortar. Based on the annual report of 2011, Walmart ecommerce saleswere $4.9 billion3, 1% of its revenue which denotes that Walmart is aggressive onecommerce arena.3http://business.time.com/2012/10/11/walmart-announces-same-day-delivery-tries-to-beat-amazon-at-its-own-game/
7. Exhibit: 3Five Forces AnalysisThreat Of Entry Threat of new entrants is low.Capital Requirement is low for e-business.Economies of scale- Amazon have the capabilityto buy the products in bulk and offer the lowestprices. It would be extremely difficult for thenew entrants to buy the products in bulk as itrequires huge capital investment.Access to channels of distributionPower Of Buyers Bargaining power of buyer´s is high. Buyershave power to easily switch to other onlinewebsites, due to simplicity in internet productsearch and comparison Amazon maintains lowpricesPower Of Suppliers Supplier power is low because of the economiesof scale amazon has. The product could beobtained from numerous of suppliers across thecountry or even across the globe.According to wall street journal, Amazonappears to be increasingly using its marketplace. They identify the hot products fromAmazon´s market place and offer the sameproduct on the lowest price or get the productdone by manufactures.Threat Of Substitute Threat of substitute for amazon is high. Thereare numerous ecommerce companies in eachand every market and the local companiescould be a big threat of substitute. To give anexample, Flipkart due to its strong localdistribution, cash on delivery method has reallyattracted those segments of Indian customerswho do not have cards or cannot pay throughPayPal.Intensity Of Competitive Rivalry Competition is intense among existing players.Amazon has countless of competitorscompeting with its product and services such aseBay, Buy.com, Apple, Wal-Mart, Yahooshopping, Staples and many more.Customer service ratings of Amazon areremaining the highest in the e-commerceindustry.
8. Exhibit: 4Environmental AnalysisDemographic Trend Demographic trends have a very good impact on Amazon becausepopulation is constantly increasing day by day and more and morepeople are willing to use online websites. Hence, the demand forAmazon product and services will continue increasing.Socio-Cultural Influences Amazon´s business is affected by seasonality which results highersales during fourth quarter of year. If too many customers accessAmazon´s website within a short period, they may experiencesystem interruptions that make their websites unavailable andreduce the volume of sell of goods and services.According to Amazon´s annual report, they may be unable toadequately staff their fulfillment and customer service centersduring these peak periods and delivery and other fulfillmentcompanies and customer service co-sources may be unable tomeet the seasonal demand.Macroeconomic Impacts Foreign Exchange Risk- According to Amazon´s annual report, theresults of operations associated with their international websitesare exposed to foreign exchange fluctuations. Upon translations,operating result may differ materially less than expected and viceversa.Amazon could be harmed by data loss or the other securitybreaches- Although, they have developed systems and processthat are designed to protect customer information and presentdata loss and other security breaches such measures cannotprovide absolute security. They rely on third party technology andsystems in certain aspects of business including authenticationtechnology to securely transmit confidential information.
9. Technological DevelopmentsIn order to compete with various competitors, Amazon needsto keep up to speed with new technology. At present, thestrategy of Amazon to provide e-books through kindle workswell although it has not yet provided the profit margin.However, Amazon has done it intentionally to keep the priceslow to reach maximum customers and then tempt thecustomer to buy eBooks through kindle. The competition isvery rampant in developed as well as emerging markets.Companies such as flipkart pose huge challenges in emergingmarkets such as India. Apple keeps coming with new products.EBay has its own strategy of selling new and old products.Political-Legal pressureGovernment Regulation is evolving and unfavorable changescould harm Amazon´s business. Existing and future laws couldimpede Amazon´s growth. These laws may cover taxation,privacy, data protection, pricing, content, copyrights,electronic waste, electronic contracts and othercommunications and web services. These regulations and lawscould diminish the demand of the products and services andincrease the cost of the business.
10. Exhibit: 5Capability Analysis of Amazon:Functional Area CapabilityOperationsSpeed of distribution.Efficiency and speed of order processing.Sales And Marketing Great product forecasting system.Effective sales promotion and execution.Create brand through advertising.Research and development Spending on long term growth. They have already opened 17 newfulfillment centers- airport hangar- size storage and shippingfacilities4Product Design High investment in technology development (e.g. Kindle) to bestleverage digital products.Customer Support Involves after sales support.Free return policy within 30 days (In case of defective products)Quality and effectiveness of customer service.4http://www.nytimes.com/2011/12/17/business/at-amazon-jeff-bezos-talks-long-term-and-means-it.html?_r=2&ref=business