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Business strategy amazon puja mishra
1. 2013
AMAZON
PUJA MISHRA
[BUSINESS STRATEGY - AMAZON]
The document details the strategy of Amazon, analyses its resources and capabilities, competition
and finally provides recommendation for the growth of Amazon
2. Executive Summary:
Introduction
Amazon is the worldĀ“s largest online retailer. It is also known as the Wal-Mart of the web.
According to AmazonĀ“s annual report, AmazonĀ“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, product
breadth, personalized recommendations and depth of content available across the e-commerce
sites.
Competitive positions
AmazonĀ“s e-commerce business model is stronger than other e-commerce business models.
Exhibit 1 shows AmazonĀ“s revenue and market share from 2010 to 2012. Exhibit 2 shows the
major competitors within each strategic group. Major competitors of Amazon are (i) All physical-
world retailers, publishers, vendors, distributors, manufacturers, other online e-commerce and
mobile e-commerce sites including sites that sell or distribute digital content. (ii) Number of
indirect competitors including media companies, web portals, comparison shopping websites and
web search engines either directly or indirectly or in collaboration with other retailers. (iii)
Companies that provide e-commerce services including website development, fulfillment and
customer 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 of
economies of scale) and providing the best quality of customer service and convenience to its
customers which other physical stores or websites may not be able to offer. Barriers to entry is
less significant because Amazon can afford to offer lower prices with its economies of scale, a
start-up may need to charge slightly high prices.
Competitive Forces and Environmental Factors
Exhibit 3 shows the five competitive forces of AmazonĀ“s. Exhibit 4 shows the environmental
factors which have been affecting Amazon. However, there are other factors which have been
affecting Amazon from long time such as :
Risk related to system interruption and redundancy- They occasionally experience system
interruption 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. Communications
system and operations could be damaged by fire, power loss, flood, computer virus. Any of these
events could damage AmazonĀ“s reputation.
Loss of key senior management personnel could negatively harm AmazonĀ“s business- They
depend on senior management and loss of any senior key employees such as president, CEO and
chairman 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 financing
and it could disrupt their business if these companies become unwilling or unable to provide
services. If their data security systems are breached or compromised they may be liable for cards
issuing banks cost, subject to fines and higher transaction fees and lose their ability to accept
credit card and debit card payments from customers, process electronic fund transfer, or facilitate
other types of online payments and AmazonĀ“s business and operating results could be affected.
Capabilities Analysis of Amazon
AmazonĀ“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 of
scale, it would be extremely difficult for the incumbents/new entrants to imitate. Maintaining and
improving operational efficiencies is the key to sustainable competitive advantage of Amazon. The
ability to offer shopping convenience, ease of purchase, speed, decision enabling information,
wide selection, discounted pricing and reliability of order fulfillment are all tied directly to
companyĀ“s logistical competencies.
Recommendations:
Customize locally: In emerging markets such as India, Amazon can expand by offering
other modes of payment like cash on delivery. To increase sales and profitability in
emerging market such as India Amazon would have to reach out with cash on delivery
service1
. The cash on delivery model could be of great significance since credit card and
net banking penetration is very low in India. The online payment systems are not very
mature. This deters people and they are more comfortable with paying cash on delivery
Innovation: 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 products
Excess returns: Amazonās ROE is negative. That implies that its unable to attain its cost of
equity. If this is temporary due to Amazons strategy of lower margins, its fine but it has to
earn excess returns in order to have positive growth.
1
http://articles.economictimes.indiatimes.com/2012-09-03/news/33563434_1_debit-card-sector-banks-
credit-cards
http://articles.economictimes.indiatimes.com/2011-07-13/news/29769249_1_cards-portfolio-credit-cards-
card-usage
5. Exhibit: 2
Competitive 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 a
competitor in just one segment i.e. Ipad vs Kindle. Hence it may not be relevant to directly
compare Amazon with its value but it does give an idea that if the competition is so
valuable and big, it could pose challenges in the future. In strategic group 2, Walmart
seems 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 that
Amazon intends to compete with Apple in Kindle vs Ipad category. As apple invests a lot in
R&D and delivers new products every 6 months, I think that Amazon also has to invest and
come 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 group
except that of Barnes and Noble and Sears. Assuming that the cost of equity to be the
same for all the companies in strategic groups i.e. 8%2
, Amazon seems to be not able to
2
Risk free rate = 2%( US treasury bond), Beta = 0.83 ( yahoo finance), Risk premium =7%. Assumed that the
risk 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 by
providing kindle at lower prices in order to generate the user base and then use it for long
term advantage
ROA: Amazon has poor ROA in comparison to all its competitors except Barnes and noble
and Sears. This implies that Amazon is not able to effectively utilize its assets
Revenues: Among online shopping strategic groups, Amazon seems to be the leader
except Walmart that has more revenues. However, it includes revenues from both online
and brick and mortar. Based on the annual report of 2011, Walmart ecommerce sales
were $4.9 billion3
, 1% of its revenue which denotes that Walmart is aggressive on
ecommerce arena.
3
http://business.time.com/2012/10/11/walmart-announces-same-day-delivery-tries-to-beat-amazon-at-its-
own-game/
7. Exhibit: 3
Five Forces Analysis
Threat Of Entry Threat of new entrants is low.
Capital Requirement is low for e-business.
Economies of scale- Amazon have the capability
to buy the products in bulk and offer the lowest
prices. It would be extremely difficult for the
new entrants to buy the products in bulk as it
requires huge capital investment.
Access to channels of distribution
Power Of Buyers Bargaining power of buyerĀ“s is high. Buyers
have power to easily switch to other online
websites, due to simplicity in internet product
search and comparison Amazon maintains low
prices
Power Of Suppliers Supplier power is low because of the economies
of scale amazon has. The product could be
obtained from numerous of suppliers across the
country or even across the globe.
According to wall street journal, Amazon
appears to be increasingly using its market
place. They identify the hot products from
AmazonĀ“s market place and offer the same
product on the lowest price or get the product
done by manufactures.
Threat Of Substitute Threat of substitute for amazon is high. There
are numerous ecommerce companies in each
and every market and the local companies
could be a big threat of substitute. To give an
example, Flipkart due to its strong local
distribution, cash on delivery method has really
attracted those segments of Indian customers
who do not have cards or cannot pay through
PayPal.
Intensity Of Competitive Rivalry Competition is intense among existing players.
Amazon has countless of competitors
competing with its product and services such as
eBay, Buy.com, Apple, Wal-Mart, Yahoo
shopping, Staples and many more.
Customer service ratings of Amazon are
remaining the highest in the e-commerce
industry.
8. Exhibit: 4
Environmental Analysis
Demographic Trend Demographic trends have a very good impact on Amazon because
population is constantly increasing day by day and more and more
people are willing to use online websites. Hence, the demand for
Amazon product and services will continue increasing.
Socio-Cultural Influences AmazonĀ“s business is affected by seasonality which results higher
sales during fourth quarter of year. If too many customers access
AmazonĀ“s website within a short period, they may experience
system interruptions that make their websites unavailable and
reduce the volume of sell of goods and services.
According to AmazonĀ“s annual report, they may be unable to
adequately staff their fulfillment and customer service centers
during these peak periods and delivery and other fulfillment
companies and customer service co-sources may be unable to
meet the seasonal demand.
Macroeconomic Impacts Foreign Exchange Risk- According to AmazonĀ“s annual report, the
results of operations associated with their international websites
are exposed to foreign exchange fluctuations. Upon translations,
operating result may differ materially less than expected and vice
versa.
Amazon could be harmed by data loss or the other security
breaches- Although, they have developed systems and process
that are designed to protect customer information and present
data loss and other security breaches such measures cannot
provide absolute security. They rely on third party technology and
systems in certain aspects of business including authentication
technology to securely transmit confidential information.
9. Technological Developments
In order to compete with various competitors, Amazon needs
to keep up to speed with new technology. At present, the
strategy of Amazon to provide e-books through kindle works
well although it has not yet provided the profit margin.
However, Amazon has done it intentionally to keep the prices
low to reach maximum customers and then tempt the
customer to buy eBooks through kindle. The competition is
very rampant in developed as well as emerging markets.
Companies such as flipkart pose huge challenges in emerging
markets such as India. Apple keeps coming with new products.
EBay has its own strategy of selling new and old products.
Political-Legal pressure
Government Regulation is evolving and unfavorable changes
could harm AmazonĀ“s business. Existing and future laws could
impede AmazonĀ“s growth. These laws may cover taxation,
privacy, data protection, pricing, content, copyrights,
electronic waste, electronic contracts and other
communications and web services. These regulations and laws
could diminish the demand of the products and services and
increase the cost of the business.
10. Exhibit: 5
Capability Analysis of Amazon:
Functional Area Capability
Operations
Speed 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 new
fulfillment centers- airport hangar- size storage and shipping
facilities4
Product Design High investment in technology development (e.g. Kindle) to best
leverage 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.
4
http://www.nytimes.com/2011/12/17/business/at-amazon-jeff-bezos-talks-long-term-and-means-
it.html?_r=2&ref=business
![2013
AMAZON
PUJA MISHRA
[BUSINESS STRATEGY - AMAZON]
The document details the strategy of Amazon, analyses its resources and capabilities, competition
and finally provides recommendation for the growth of Amazon](https://image.slidesharecdn.com/businessstrategyamazonpujamishra-130617041337-phpapp01/85/Business-strategy-amazon-puja-mishra-1-320.jpg?cb=1371442456)
