Amazon A Corporate Strategic Analysis

Amazon.com, INC.
strategic position and business model of
the retail giant in the USA

Executive Summary
Amazon is a company that is rewarded for not making money
(Yarow, 2013). Its investors persist in pushing its stock price to
record levels. Amazon posted $75 billion in revenues in 2013
with a market cap of $166 billion. Yet its proit margin is at a
poor -0.24% (Statista, 2014). “This isn’t supposed to happen,
it violates mainstream inance theory” highlights David Streit-
feld of the New York Times.
The scepticism that Amazon has amassed over the media
isn’t shared by its investors, nor does it contribute to corrod-
ing investor conidence in the retail giant. Amazon’s mission
is to be the world’s most customer centric company (Ama-
zon, 2014). Streitfeld (2013) further highlights that “Bezos (Jeff
Bezos, CEO of Amazon) has chosen to run Amazon to be
the biggest, most powerful and successful retailer on Earth 20
years from now. Any fool could run it proitably today”.
Amazon has branched into many forms of commerce and
technology but at the core of this ecosystem, it sells goods
cheap and delivers them cheap. The analysis of this ecosys-
tem is beyond the scope of this report. Instead it focuses on
the core of this ecosystem- online retail in the United States.
The purpose of this report is to identify Amazon’s next best
move. This report will do this by conducting a situational anal-
ysis, closely examining its business model and the dynamics
of the online retail industry.
At an impressive $200 billion, this online retail industry is set
to grow to over $371 billion by 2017 in the USA. Competition
in this industry is primarily dominated by the behemoth Apple
and Walmart along with Staples, EBay and Best Buy.
A broader, macroeconomic look at the online retail industry
reveals that the 2008 inancial crisis and the credit squeeze
have had a negative effect on the industry however this has
directed consumers to seek out cheaper online retail alterna-
tives. A fury of tax issues regarding online retailers have added
to legislative woes in the industry. The rapid growth in busi-
ness intelligence has resulted in irms becoming more cus-
tomer centric.
Amazon relies on three integral streams of revenue. It has
amassed huge growth in the sales of its online products,
charges usage fees to users who sell on Amazon and charges
a commission. Amazon also earns revenues through the sub-
scription fees accumulated from its Prime, Mom and Smile.
There are three key drivers of revenue for Amazon. The on-
line retail industry is forecasted to grow and Amazon proves
eficient in providing an alternative to traditional retail stores.
Another key driver is that of online trafic. Broadband adoption
has reached 70% penetration in the US. Alongside this, there
are aggressively growing trends in tablet and smartphone
sales.
This leaves Amazon with strong industry positions as a leader
with an outstanding track record with being able to sell prod-
ucts at cut-throat prices and world class warehousing and
distribution systems, achieving eonomies of scope and scale.
This could allow for Amazon to establish a physical presence
and increase revenues through its subscription plans. Despite
this it faces proitability challenges and threats and attacks to
its security systems.
Furthermore, Amazon faces intense competitive pressure
from industry players who are more experienced and are
more resourceful. Amazon also faces organizational complex-
ity, proportional to its growth. Mismanagement could result in
growth restrictions, damage reputation and also affect operat-
ing results. Amazon also faces issues with seasonality in Q4 of
every year with a spike in unanticipated demand and shipping
delays.
Amazon has attempted to counter these strategic challenges
by minimizing costs wherever possible and drawing in sales
from its ecosystem. It has also had to execute countermea-
sures such as offering discounts to unsatisied customers.
Amazon has inadequately addressed its growth strategies by
failing to rectify human resource issues and logistics misman-
agement, particularly in the high demand Q4 period.
Amazon should consider entering a new market with a new
product to boost customer loyalty. It should continue to devel-
op this ecosystem that keeps customers engaged and loyal.
It can do this by developing a smartphone, proprietary built to
focus customers back to Amazon’s own retail services, much
like the Kindle. This will give it considerable edge over com-
petitors because it will enable Amazon to capture the growing
smartphone and mobile shopping trend, understand custom-
ers better by collecting intelligence from this personal device
based on user behavior to anticipate and forecast demand.
This customer centric tactic is strongly aligned with its mis-
sion, is future proof and a logical product extension of its own
electronics product line such as the Kindle.

A1 Target Client Base 7
A2 Value Added Proposition 7
A2.1 Subscription Plans 7
A2.2 Price Leadership 7
A3 Cost Driven Structure 8
A3.1 Distribution Center 8
A3.2 Automation 8
A4 Revenue Streams 9
A4.1 Asset Sales 9
A4.2 Usage Fees 9
A4.3 Subscription Fees 9
A5.1 Revenue Drivers 10
A5.2 Online Retail Industry growth 10
A5.3 Online Trafic Growth 10
A5.4 Proit Margins 10
B1 Macroeconomic Analysis 11
B1.1 Internet Usage 11
B1.2 The US Economy 11
B1.3 Legislation 11
B1.4 Comprehensive Scan 11
B2 Players in the Online Retail Industry 12
B2.1 Strategies of Different Groups 12
B2.2 Strategic Mobility 12
B3 Industry Rivalry 13
B4 Critical Success Factors 14
Photo: An Amazon.com employee grabs boxes off the conveyor belt to load in a truck at their Fernley, NV warehouse. Scott Sady/AP
A Business Model C Amazon.com, INC
B The Online Retail Industry
D Strategic Challenges
C1 Value Chain Analysis 15
C1.1 Logistics 15
C1.2 Marketing 15
C1.3 IT and HR Support Activities 15
C2 Core Competencies and Capabilities 16
C2.1 Price Leadership 16
C2.2 Third Party Ecosystem 16
C2.3 User Experience 16
D1 Competitive Threats 18
D2 Operational Complexity 18
D3 Seasonality Issues 18
4

E Addressing Challenges
E1 Competitive Threats 19
E2 Operational Complexity 19
E3 Seasonality Issues 19
F Strategic Options
F1 TOWS Matrix 20
F2 Generating Strategic Options 21
F2.1 New product in New Market 21
F2.2 Existing Product New Market 21
F2.3 Existing Product Penetration 22
F2.4 Evaluating Options 22
G Recommendation 23
H Additional Material
H1 Reference List 15
H2 List of Tables & Figures 15
H3 Supplementary Appendix 15
5

Online retail is a $200 bilion industry which consists of revenues
generated by the sale of goods on online retail channels. The
sector is expected to grow healthily to $371.4bil by 2017 as it
has been since 2009 (Figure 1).
The growth is driven by rivalry among a few key players such
as Amazon™, Apple™, Staples™, Walmart™, Ebay™ and
Best Buy™. This report will speciically focus on a situational
analysis of Amazon’s online retail arm in the USA using tools
such as strategic group analysis (SGA), macroeconomic
analysis, Porter’s 5 Forces analysis (P5) compiled with business
intelligence from EBSCO databases and the Chartered
Management Institute.
The report will then proceed to advise on Amazon’s future
strategic direction and how it can increase its revenues and
gain a bigger share of the growing online retail industry.
Introduction
Online Retail
Online Retail:
$371bil by 2017
Figure 1: A steadily growing industry, Source: Marketline, 2012
6

A. Business Model
A1Target Client Base
As of 2013, Amazon has a mass market client base of 143
million active customers throughout the US for its online re-
tail (Compete.com). The Wharton School of Finance highlights
that its target client base is unclear. Amazon is “part retailer,
part shopping mall and part landlord to third party retailers
who leverage Amazon’s existing resources. Wharton futhers
on to highlight that this makes Amazon a “mass market player
with niche products”.
Despite this Alexa breaks down its online trafic between male
and female consumers with an over representative females
along with equal dispersions between no college education to
graduate school and a minority with a college education (Al-
exa, 2014). See Supplementary Appendix J for a more com-
prehensive breakdown.
A2 Value Added Proposition
A2.1 Subscription Plans
Amazon delivers value to select target clients such as mothers
and students with its “Amazon Mom™” and “Amazon Stu-
dent™”. Value is delivered to these clients with discounts in
baby and family household products with free two day ship-
ping along with discounts and deals for students (Amazon,
2013). Figure 2 shows a breakdown of these consumer seg-
ments where 93% of customers state that they would either
join or renew their program, this service delivers value and
promises strong returns for Amazon (Levin, 2013).
Ultimately, the results of its efforts has led to Amazon securing
higher consumer satisfaction scores than other retailers in the
ACSI online retail industry benchmark (ACSI, 2013). Further-
more, Amazon has performed better than other retailers and
beat the industry benchmark for the last 10 years (Figure 3).
A2.2 Price Leadership
Amazon also brings its products to online retail at the low-
est prices possible. Being able to sell consumer goods like
books and toys at a cheaper price gives them advantages in
the market and helps Amazon retain consumers (Bloomberg,
2013). For example, in winter 2013, Amazon priced their toys
3 percent below Walmart on average, a sucessful tactic to win
market share and customers during holiday seasons. Com-
petitive measures such as these have ultimately resulted in
Amazon achieving price leadership over the top 5 retailers in
this industry (Figure 4).
Figure 4: Amazon’s Price leadership over competitors, Source: McKinsey, 2012
Figure 3: American Customer Satisfaction Index Scores, Source: ACSI, 2013
Figure 2: Breakdown of
Subscription Plans, Source:
McKinsey, 2012
7

A3 Cost Driven Structure
A3.1 Distribution Centers
Amazon have announced that they plan to open a 1.2 million-
square-foot logistics center in Moreno Valley, North America,
this warehouse would need more than 1,000 employees
(Press Enterprise, 2012). Warehouses like these are part of
Amazon’s huge scale of supply chain components. The veloc-
ity at which Amazon shifts stock is almost half that of physical
retail stores and contributes to signiicant cost advantages for
Amazon through economies of scale (Tutor2u, 2012). Table 1
details the end results of its logistics power compared to typi-
cal multichannel retailers, speciically in terms of distribution
centers in the United States (Mckinsey, 2012).
A3.2 Automation
Economies of scope are also characteristic of Amazon’s cost
driven business model. In 2012, Amazon acquired Kiva Sys-
tems, a company whose software and hardware systems
streamline the process of picking, packing and shipping e-
commerce products (TechCrunch, 2012). This decision to
incorporate Kiva Systems into its own business model has
allowed for more cost savings which can be passed on to on-
line retail consumers; thereby supporting its customer centric
mission.
8

A4 Revenue Streams
Amazon’s revenue streams rely on ixed menu pricing strate-
gies and dynamic ones such as real time market pricing (RTM).
Prices will adjust based on Amazon’s competitive analysis
technologies to compare prices across retailers and deliver
the best possible price.
A4.1 Asset Sales
Amazon sells ownership rights of physical products (Oster-
walder and Pigneur, 2010). Amazon.com™ sells books, mu-
sic, consumer electronics and more online. The sales and rev-
enue shown in Figure 13 and 6 show that although Amazon
has had increasing revenues year on year, its growth percent-
age had declined 2011 to 2012. An improvement may be ex-
pected in Q4 2013 given Amazon’s 9 month improvement in
2013 (Figure 7).
A4.2 Usage Fees
Amazon charges usage fees to sellers online, thereby earning
commissions from the sale of third party products. Amazon
earns a 0.99 USD fee per successfully sold item plus a sales
fee, which is a percentage of the inal sale value (Amazon,
2013). Examples of some of the highest and lowest sales fees
are detailed in Figure 8.
A4.3 Subscription Fees
Amazon charges subscription fees on its Amazon Prime™,
Amazon Student™, Amazon Mom™ and Amazon Smile™
programs (Amazon, 2013). Consumers that have been locked
in by these subscription programs have higher spending and
therefore the programs improve contributions to cash low.
56% of US product sales by Amazon are afiliated with con-
sumers in these programs (Levin, 2013). 40% of Amazon’s
total USA customers are afiliated with these programs and
contribute up to $1200 in revenue per year, per member, il-
lustrated in Figure 9 (Morningstar, 2013).
Figure 6: Decline in revenue growth 2012 Source: Amazon, 2013
2012
2011
2010
Figure 7: Stronger sales compared to last year, Source: Amazon, 2013
Figure 9: Over half of Amazon’s sales come through the Prime program,
Source: McKinsey, 2012
Figure 8: Some product categories have different fee structures, for a full
breakdown see Appendix 1, Source: Amazon, 2013
Sales 0,000 millions
Commission %
USD per person
9

A5 Revenue Drivers
A5.1 Online Retail Industry Growth
The online retail industry is expected to grow yearly in revenue
(Figure 10). Forbes (2013) highlights that Amazon is likely to
lead the way in this future growth. Forrester Research (2013),
emphasizes that online stores such as Amazon prove to erode
into traditional brick and mortar stores, thereby strengthen-
ing its growth forecast, provided they sustain their competitive
advantages.
A5.2 Online Trafic
Figure 11 shows an impressive home broadband adoption
trend in the USA. Over 70% of US adults currently have home
broadband. This widens the customer pool for Amazon’s on-
line retail business in two perspectives. Consumers are now
more likely to shop online using desktop PC’s and the simul-
taneous increase in Kindle and tablet shipments (Figure 12)
means that Amazon can focus Kindle users back to its online
retail through in-tablet purchases (Forbes, 2013). Kindles cur-
rently make up 22% of the US tablet market (Owen, 2012).
This gives Amazon a strong advantage in locking in consum-
ers who will purchase through Amazons own retail service.
A5.3 Proit Margins
Despite Amazon showing promising growth in revenues and op-
erations, its razor thin proit margins and net income are of key
concern (Figure 13). It currently performs the worst compared
to other players in this industry, illustrated by the light blue line
(Figure 14). Apple dominates on its 20% margin while Amazon
actually operates on a loss. Amazon may try to improve these
margins in future after successfully locking in enough customers
which places adequate criticality on improving market share and
sales targets.
Figure 10: Online retail industry forecast, Source: Marckeline, 2012
Figure 11: Broadband adoption in the USA at 70%,
Source: Pew Internet and American Life project Surveys, 2013
Figure 12: Tablet sales to double by 2016 (millions), Source: IDC, 2013
Figure 13: Amazon’s low income Source: Statista, 2013
Figure 14: Amazon’s proit margins compared to competition
Source: Statista, 2013
10

B The Online Retail Industry
B1 Macroeconomic Analysis
B1.1 The US Economy
The Economic state in the US is both an advantage and a
disadvantage to online retailing companies as there is less ex-
penditure due to the results of the credit squeeze from the
2008 inancial crisis. People have turned to online retailing as
a means to saving money by comparing goods as well as sav-
ing money on travel expenses which proves beneicial on an
environmental front.
B1.2 Legislation
There have constantly been new regulations within the online
retailing industry requiring companies within this industry to be
aware of these ever changing factors. If companies are not
careful they are likely to constantly face legal charges because
of the fast growing market within the online retailing.
B1.3 Internet Usage
Companies within this industry have a social and political ad-
vantage as the government are encouraging broadband net-
work providers to increase their competition and drive down
prices. This is particularly important as there is a fast internet
growth rate leading to people using internet services more
such as social networks and more importantly online retailing.
B1.4 Comprehensive Table
11

B2 Players in the Online Retail Industry
B2.2 Strategic Mobility
Figure 15: Strategic clusters A, B and C found through SGA analysis
B2.1 Characteristics of different groups
12

B3 Industry Forces
Figure 16: Porter’s 5 Forces Analysis Source: Marketline et.al., 2013
is
13

Photo: Christopher Chan/Flickr
Figure 17: Amazon comes into 3rd in brand value, Source: Interbrand, 2013
B4 Critical Success Factors
B4.1 Logistics
Eficient distribution systems are a hallmark strategy of this
industry. Amazon must keep up a well-conigured distribu-
tion strategy. It has a number of warehouses that are geo-
graphically spread within the country and caters to every
market. Amazon must compete with other industries that
also require logistics to be a critical success factor such as
Walmart where every store is at the maximum, a day’s drive
from the distribution center. These centers operate 24x7 us-
ing cutting edge stock processing IT systems along with a
leet of over 12,00 trailers, all of which are satellite tracked for
centralized information relay (BoozandCo, 2002).
B4.2 Brand Value
Brand value is an intangible resource and a key competi-
tive advantage for all online retail industry players. It helps
retain customers and creates a barrier to entry for unknown
online retail brands. Figure 17 shows the strong positions
of Walmart and Apple (Forbes, 2013) with Amazon (Brand
Directory, 2013) coming into third position when revenues
are plotted against brand values.
B4.3 Customer Centricity
Customer centricity is a key success factor for all competi-
tors in this industry. The degree of centricity varies from
one company to another, for example, Apple Inc. aims to
“delight the customer” and deliver a “superior customer
experience” at its retail stores (Denning, 2011), while Ama-
zon uses the “sense and respond” method where it uses
technology-based capabilities to collect and analyse data
on customer experiences and in turn work to keep custom-
er satisfaction at its best (Hinshaw, 2013).
14

C. Amazon.com, INC
Figure 18: Amazon’s spends 300% more on R&D, Source: McKinsey, 2013
C1.3 IT and HR Support Activities
Amazon’s primary marketing activities were supported by up
to $4.5bil of technology investments and up to $1bil of human
resource and administrative expenditures. These investments
have been necessary to further deliver value to the customer
by providing a secure online web service and the ability to
personalize a customer’s shopping experience. Search engine
optimization investments have also led to Amazon’s website
competing with the worlds top 10 most visited websites (Al-
exa, 2013); enhancing its brand equity.
Figure 18 illustrates the positive impacts of Amazons’ best in
class logistics systems (McKinsey, 2012). Amazon spends up
to 300% more in RandD than the top 5 retailers in the US to
deliver the maximum value at the end of its value chain (Figure
19).
C1 Value Chain Analysis
C1.1 Logistics
Taking into account customer centric approach of the com-
pany, one of the key aspects of value creation for Amazon is
order fulilment, which is when the product is actually received
by the customer. This process is tightly connected with sup-
ply chain and is supported by outbound and inbound logistics
(Figure 13). In inbound logistics, the company reduces costs
by ordering the products from distributors, which contributes
to optimization of stock management processes. Outbound
logistics consists of picking, sorting, packing and shipping.
Here, the costs are being constantly reduced by technological
improvements.
Investment in expansion of fulilment space brings Amazon
ever closer to the customer. Amazon ensures even faster or-
der fulilment using its supply chain partners, which deliver
items packaged in Amazon packaging directly to customer.
This also contributes to increased product range, product
availability, and minimization of transportation costs in fulil-
ment. Technological improvements, drop shipping, and broad
fulilment space help Amazon realize its swiftness potential
and to provide a wider range of products ensuring company’s
image of the fastest shipper and “everything store”.
C1.2 Marketing
Amazon utilize traditional forms of marketing such as print,
internet banners, television and also leverage its participatory
network (see section C2.3) to great promotional advantage.
This includes Pay-per-click advertising on search engines
such as Google, Bing and Yahoo, E-Mail direct marketing and
a dedicated customer service (Amazon, 2013)
Amazons associates program founded in 1996 allows smaller
sites on the internet to generate trafic for Amazon. Amazon’s
products are posted on the third party sites and pays up to
15% if a successful lead is obtained. This presence is seen
across millions of websites (Spainhower, 2004). This has led to
unsurpassed visibility of Amazon and has boosted search en-
gine rankings. Ultimately, this has given competitive advantage
in its value chain, created by its own network of consumers.
15

Figure 19: Amazon’s superior work capital management, Source: McKinsey, 2013
Table 7:Threats to Amazon’s operability, Source: Amazon, 2013
C2 Core Competencies and
Capabilities
C2.1Price
Amazon is adept on offering low prices to boost sales and
retain customers. One of the key ways it is able to do this
is to minimize logistics costs. Amazon reduces its overheads
by only stocking a small percentage of its products. The efi-
cient cost effective distribution and work capital management
(Figure 15) allows Amazon to pass on the savings to custom-
ers (Sapinhower, 2004). If the top 10 retailers had Amazon’s
abilities to cut these costs in distribution, they could save over
$150bil which makes this a key, unique competency (McKin-
sey, 2012).
C2.2 Third party Ecosystem
Amazon has created a competitive ecosystem of third party
sellers who place their products for sale on Amazon. This
strategy helps Amazon promote its reputation and deliver the
cheapest prices from the result of pricing competition in the
ecosystem. Therefore, sellers in turn serve Amazon’s own in-
terests and boosts customer loyalty (Sapinhower, 2004).
C2.3 User Experience
Amazon’s huge knowledge database of reviews and ratings
has developed into a platform for a large community of con-
sumers. The Economist (2009) highlights that these reviews
are signiicant factors that inluence a purchase decision at
Amazon. They deliver a social style to shopping on Amazon.
This participatory network of reviews elevate the online experi-
ence by creating a community, thereby delivering a valuable
sense of belonging to the end consumer (Subramani, 2003).
16

C3 SWOT
“Hoverdrones right to
your door,
your delivery in 30
minutes”
17

D. Strategic Challenges
D1 Competitive Threats
Amazon faces intense competition as illustrated in the strategic
group analysis. Amazon faces multiple competitive threats both
inside the online retail industry and outside, from other industries
such as digital content, digital media devices and web services.
Many of Amazon’s current competitors such as Apple and Ama-
zon have greater resources, longer histories and greater brand
recognition.
This competition can intensify if competitors choose to venture
into industries where Amazon already faces competition, for ex-
ample, Apple competes in online retail and cloud storage ser-
vices with its iCloud against Amazon’s retail and Web Services.
Traditional brick and mortar irms such as WalMart and Best Buy
are rapidly developing their competencies in online retail. Despite
this, “merchants and marketers not renowned for their techno-
logical skills have more to do to catch up with the way people are
shopping” (Jopson, 2013).
D2 Operational Complexity
Amazon faces an ever increasing amount of operational com-
plexity. Amazon is rapidly and signiicantly expanding its op-
erations in North America and abroad. This has led to scaling
IT systems, infrastructure and human resources. In result, this
places pressure on Amazon’s management, personnel, inancial
resources and operations.
Management of these new developments is crucial and other-
wise could lead to growth restrictions, damage reputation, and
also affect operating results. Amazon already have low proit
margins and any such consequences could also lead to a loss of
investor conidence and ultimately its market value.
Competitors such as Ebay are able to evade many of these is-
sues as they offer no physical services while Apple and Wal-Mart
already have considerable expertise and competency in dealing
with complex operational structures.
D3 Seasonality Issues
Seasonality is another key strategic concern. As shown in pre-
viously, in igure 13, Amazon experiences a spike in Q4 of ev-
ery year. Amazon highlights the following reasons which may
cause luctuations in operating results and luctuations (Ama-
zon, 2013):
The ability to retain and increase sales to existing customers,
attract new customers and satisfy customer demands
The ability to retain and expand its network of sellers
The ability to offer products on favourable terms, manage in-
ventory and fulil orders
Timing, effectiveness and costs of expansion and upgrades of
Amazons systems and infrastructure
Variations in the mix of products and services Amazon sells.
The extent to which Amazon invests in technology & content,
fulilment and other expenses
The consequences of these are signiicantly heightened during
Q4 when it is imperative that Amazon successfully meet con-
sumer expectations and demand. Furthermore, if Amazon is un-
able to stock or restock popular products in suficient amounts,
it could have a signiicant impact on revenue and future growth.
On the other hand, overstocking may lead to discounting and
write offs which can reduce proitability. Q4 or the holiday sea-
son can also bring increases in net shipping costs.
18

Figure 20: Amazon hits close to 150M unique consumers, Source: Compete, 2014
E1 Competitive Threats
Amazon has already established itself as a leader in low cost
online retail. This offers signiicant competitive advantages over
other competitors in this industry. The key strategy which Ama-
zon deploys to compete is a “platform strategy” (Saughnessy,
2012). Similar to Apple, Amazon’s core business is online retail.
The tactic used to attract customers to online retail is by creating
an ecosystem with other products such as the Kindle and Ama-
zon Web Services- Amazon’s cloud storage system.
Amazon’s value propositions of cost leadership and loyalty
schemes also help gain bigger market share. Despite this, Ama-
zon’s growth strategy is long term oriented and still has a long
way to go before it reaches the proit and revenue levels of Apple
and Wal-Mart. It is still in the early phases of developing a fully
functional ecosystem like Apple has done with its iTunes store,
electronic products and developer community.
Its long term platform/ ecosystem may be at a risk if it is un-
able to improve its proit levels as it will need adequate inancing
for diversiication plans to fully develop this ecosystem. Overall,
Amazon is still in the early phases of competing with other online
retail players but has gained strong competencies in several are-
nas which will help its long term strategy.
E2 Operational Complexity
Amazon has recently been having issues regarding scalability,
especially regarding its fulilment centers. December 2013 con-
cluded in a mass of undelivered orders due to third party de-
livery failures (Walters, 2013). Furthermore, Amazon states that
this could have been the result of unintended consequences of
its Prime program. The key value proposition discussed earlier
received 1 million new customers in December and Amazon is
restricting the number of new subscriptions so that the quality of
service to older members does not deteriorate.
Amazon has already issued $20 gift cards to those who did not
get their deliveries in time for Christmas. A spokeswoman re-
cently stated that Amazon could not forecast the spike in or-
ders. This clearly shows mis management given that Amazon is
expected to have spikes in Q4 of every year. In addition to this,
amazon also faces woes in its distribution centers from union-
ized workers who protest against poor working conditions and
health risks (Young, 2013).
It is inadequately addressing its growth strategies by failing to
rectify human resource issues and it has been unable to scale its
logistics operations. These have tarnished its brand reputation
and impeded successful growth.
E3 Seasonality Issues
Addressing seasonality issues is something Amazon also strug-
gling with. Despite having state of the art business intelligence
processing capabilities with its cloud infrastructure, it has been
unable to prudently forecast and anticipate heightened demand
and this has caused adverse effects on its proitability, for ex-
ample, issuing discounts and gift vouchers after failing to deliver
orders in December 2013.
In other perspectives, Amazon has been successful in attract-
ing new customers. Figure 20 shows Amazons inclining trend
in the number of website visits which currently stands at 143mil
in the United States, up 19% from last year (Compete.com,
2014). Amazon has been able to maintain its online retail at-
tractiveness.
Another area of concern is Amazon’s new expansion into Ama-
zonFresh, a service that delivers fresh groceries for a yearly fee
of $299.
Although this may add to Amazons revenue streams as a sub-
scription plan, it needs to be noted that this new venture will
require extensive resources such as new warehousing, delivery
and IT systems. Given Amazon’s already low proitability and re-
peated inability to successfully meet cyclical demand, the tim-
ing of the launch of AmazonFresh is questionable.
On the other hand, in the longer term, the combined resourc-
es of Amazon as a whole with the addition of AmazonFresh
may help combat seasonal pressures in demand. Therefore,
although it may not seem like an evident countermeasure, cur-
rent diversiications may prove beneicial in the long run.
E. Addressing Challenges
19

Table 9: Cross examining SWOT with TOWS matrix
F. Strategic Options
F1 Putting the SWOT
into action
The SWOT matrix features limitations in that it is restricted to
the analysis of strengths and weaknesses to reduce threats and
maximize opportunity. The TOWS matrix enables the identiica-
tion of external opportunities and threats and compares them to
Amazon’s internal strengths and weaknesses to help develop
ideas for strategic options.
Strengths Weaknesses Opportunities Threats
Industry leading
retailer (S1)
Lack of physical
presence (W1)
Establish physical
presence (O1)
Outsourced pay-
ments systems are
a major risk (T1)
Best customer
satisfaction scores
(S2)
Incredibly low
margins (W2)
Grow subscription
plans (O2)
Scalability issues
(T2)
Cost Leadership
(S3)
IT systems at risk
of cyber attacks
(W3)
Leaders in distribu-
tion (S4)
Leaders in distribution(S4)+Establish physical presence(O1)= im-
proved ability and opportunity in leveraging current distribution
competencies to physical stores.
Best customer satisfaction scores(S2)+Grow subscription
plans(O2)= opportunity to expand customer base and grow fu-
ture revenues with subscription plans
Industry leading retailer(S1)+leaders in distribution(S4)+Establish
physical presence(O1)= brand image and reputation that has al-
ready been built can enable physical stores to be a success and
distribution strengths can ensure reliability.
Establishing physical presence(O1)+Growing subscription
plans(O2)+Best customer satisfaction scores= potential to cre-
ate more subscription customers through retail, increasing rev-
enues and physical assets
Incredibly low margins(W2)+Grow subscription plans(O2)= pos-
sibility to increase subscription plan prices to improve margins
Lack of physical presence(W1)+Grow subscription
plans(O2)+Establish physical presence= potential to increase
customer loyalty, similar as O1+O2
Cost Leadership(S3)+Scalability issues(T2)+Leaders in
distribution(S4)= If Amazon maintains this strength, it can chan-
nel cost savings to facilitate and inance organizational scalability
such as IT infrastructure and human resources
Incredibly low margins(W2)+Scalability issues(T2)+Customer
satisfaction scores(S2)= Customer loyalty may incur an accept-
able amount of damage if Amazon were to increase its margins
to facilitate scalability for future growth.
20

F2 Generating
Strategic Options
F2.1 New Product New Market
This option recommends that Amazon venture into the smart-
phone market. Its Kindle device propels Amazon’s retail of
books, music and video. Amazon can accelerate and increase
online retail of these by generating sales through a smartphone.
Consistency with strategic objectives & vision
As analysed before, Amazon chose to pursue an ecosystem
strategy to maximize online sales. Amazon’s vision is to be cus-
tomer centric. A smartphone will be used by consumers on a
regular basis and delivering Amazon’s online retail experience
through the phone will be highly customer centric.
Creation of competitive advantage
Amazon already uses Kindle to drive online retail sales. This ef-
fectively enables it to compete with Apple in retail against the
iPad. Launching a phone at breakeven prices like the Kindle will
ensure fast consumer adoption rate and in turn, increase online
retail revenues through Amazon’s own app store.
Financial Viability
Amazon can gain considerable cost savings by using the same
manufacturers it uses to build its Kindle line. This diversiication
should be able to achieve capital from investors because of its
close link to Amazon’s mission. Despite this, a delayed R&D ex-
penditure be more advisable due to the cash low strains Ama-
zon has experienced over December 2013.
Satisfaction of current and future customer needs
As analysed before, smartphone trends are expected to con-
tinue to grow, as online shopping shifts to mobile mediums,
Amazon will be able to satisfy this customer need with Kindle
tablet and Smartphone. Furthermore, Nielsen (2013) states that
smartphone penetration in the USA stands at 61%. This provides
Amazon ample opportunity to cater to a low cost segment of the
market and ultimately achieve its mission of customer centricity
Potential response of competitors
Kindle posed a threat to Apples iPad in the US and developing a
smartphone can be perceived as an additional threat. Other re-
tailers in the US such as Wal-Mart have the inancial resources to
develop their own products however, unlike Apple and Amazon
who have an ecosystem of services developed to increase online
retail sales, Wal-Mart may be unable to compete here.
Feasibility of implementing required organisational changes
The SWOT shows that Amazon has the necessary skills and
competencies required to develop its own smartphone. Given its
Kindle success, it has the necessary industry relations in order
to research, build and develop a smartphone. The same Android
operating system can be ported into the phone.
Robustness under different future scenarios
This option is highly robust for future scenarios, smartphones
are emerging technologies and as a result, they are commonly
priced at a premium such as the iPhone and the GalaxyS4 by
Samsung. Amazon can expend into the low cost smartphones
market.
F2.2 Existing Product New Market
Bensinger (2013) highlights that Amazon can use this as a strat-
egy to drive sales of general merchandise which can bring high-
er proit margins. This contributes well to Amazons long term
strategy of becoming the biggest retailer in the future. This also
entrusts shareholder conidence who are already sceptical at its
razor thin margins.
Provided that Amazon is able to scale this operation effectively
and manage entry into new markets, this will create consider-
able competitive threat to others. The Amazon Fresh service will
bring along with it the brand image and recognition Amazon has
already built. Despite this, many consumers may still prefer self-
shopping at traditional stores.
Financial Viability
New IT infrastructures will need to be developed to cope with
the additional demand, and a scaled logistics network will also
be required. Additional human resources will be required in the
management and delivery of this service such as warehouse
personnel. It is advised that Amazon progress from one market
to another at a point in the inancial year when it will not create a
drastic impact in other core operations.
Groceries are commodities and therefore there will always exist
demand for them. Amazon brings same day door to door gro-
cery deliveries as a value proposition and provided it can meet
future demands by expanding its grocery range, it should grow
its loyal customer base.
21

Table 10: Option 1 ranks the highest after evaluating options
Wal-Mart, is most likely to see AmazonFresh as a threat to its
grocery business. It is likely that it will imitate Amazon’s value
proposition with same day door to door deliveries given its re-
sources.
Amazon will need to scale its logistics capabilities and its busi-
ness intelligence capabilities. It needs to be able to make ad-
equate storage for grocery products, manage the delivery of
products and forecast order demand adequately.
This competitive strategy can be easily imitated by Wal-Mart
however home grocery deliveries is an emerging service and fu-
ture oriented. Amazon should attempt to capture the physical
retail store market alongside this.
F2.3 Existing Product Penetration
Physical stores can become customer centric such as Apple
and can contribute to Amazon’s vision to become the biggest
retailer however a physical presence is not Amazon’s compe-
tency.
Minimal competitive advantage to be gained here other than
brand image development and recognition.
Financial Viability
Highly capital intensive in setting up physical stores and add to
depreciation of assets on balance sheets. Can severely impact
cash low and liquidity.
Growing attractiveness of online retail combined with the in-
crease in mobile shopping will show misalignment with custom-
er needs for the future. Physical retail may be attractive for the
near future.
All retailers in strategic groups A & B have physical retail stores.
EBay and Amazon do not. Capital investment required is too
high. Other competitors already have considerable history and
expertise. It may not be worth competing here.
High costs and organizational changes will be required to oper-
ate a duplicity of online and retail channels.
Poorly oriented for future however traditional retail channels will
exist but cost-beneit may be unsatisfactory to pursue this op-
tion.
F2.4 Evaluating Options
Option 1 Option 2 Option 3
Consistency with
strategic objectives
& vision
1=Poor Strate-
gic alignment,
5=Strong align-
ment
4 4 1
Creation of com-
petitive advantage
1=Unattractive
competitive attrac-
tiveness, 5=Strong
competitive advan-
tages
5 4 2
Financial Viability
1=Extremely high
costs, severe im-
pact on inances,
5=Acceptable level
of risk
4 3 1
Satisfaction of
current customer
needs
1=Inadequate sat-
isfaction, 5=Meets
needs well
4 3 4
Satisfaction of
future customer
needs
1=Inadequate,
5=Meets future
needs well
5 4 3
Potential response
of competitors
1=Minimal com-
petitor response
5=May be detected
as competitive
threat
4 3 2
Feasibility of imple-
menting required
organisational
changes
1=Dificult to
implement, needs
to undergo exten-
sive organization
reconiguration
and disruption,
5=Acceptable level
of organizational
change
4 3 2
Robustness under
different future
scenarios
1=Futuristic,
5=Shows strong
future orientation
5 3 1
Total 35 27 16
22

G. Recommendation
The comparison table shows that Option 1 is the most attractive
option. Launching a smartphone to channel customers into Ama-
zon’s online retail service meets strategic objectives of customer
centricity because it is a highly personal product, creates strong
competitive advantages because it acts as another channel to
grow its customers and revenue and the intellectual property rights
associated with the device will minimize duplication of this advan-
tage.
Amazon already has successfully established a Kindle line to boost
online retail revenues of digital content and merchandise. There-
fore, the smartphone will be seen by investors as a logical portfolio
it. It also satisies the growing mobile shopping demand which
Option 3 does not satisfy. Despite this, this move may be seen as
a threat by competitors such as Apple.
Launching this product can be done by the same department re-
sponsible for developing the Kindle and therefore drastic organi-
zational changes should not be expected in contract to option 3.
Amazon should develop a smartphone with a proprietary Android
operating system like the Kindle and push its marketing to these
devices, offer digital content and customized access to its online
retail store. This device will enable Amazon to connect to its cus-
tomers better, anticipate demand to minimize Q4 spikes and boost
revenues.
23

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25

H2 List of Tables and Figures
Item no. Description Page
Figure 1
Business Model
A2.1 Figure 2
A2.1 Figure 3
A2.2 Figure 4
A4.1 Figure 5
A4.1 Figure 6
A4.2 Figure 7
A4.3 Figure 8
A5.1 Figure 9
A5.2 Figure 10
A5.2 Figure 11
A5.3 Figure 12
A5.3 Figure 13
The Online Retail Industry
Figure 14
Figure 15
Figure 16
Amazon.com, INC
C1.3 Figure 17
C2.1 Figure 18
C2.1 Figure 19
E3 Figure 20
Tables
A3.1 Table 1
A3.2 Table 2
B1.4 Table 3
B2.1 Table 4
B2.2 Table 5
C1.3 Table 6
C1.3 Table 7
C3 Table 8
F1 Table 9
F2.4 Table 10
Online retail industry forecast
Subscription Plans
Subscription Plans
Cost Leadership
Asset Sales
Asset Sales
Usage Fees
Subscription Fees
Online retail industry growth
Online Trafic
Online Trafic
Proit Margins
Proit Margins
Characteristics of strategic groups
Industry Forces
Brand Value
IT and HR Support Activities
Price
Work Capital Management
Unique visitors
Distribution Centres
Automation
Comprehensive Table
Characteristics of strategic groups
Strategic Mobility
SWOT
TOWS
Evaluating Options
p.4
p.5
p.5
p.5
p.7
p.7
p.7
p.7
p.8
p.8
p.8
p.8
p.8
p.10
p.11
p.12
p.13
p.14
p.16
p.19
p.6
p.6
p.9
p.10
p.10
p.13
p.13
p.15
p20
p22
26

© North Polar Consultancy Services
Produced in the United Kingdom, January 2014
Amazon an all related products are trademarks of Amazon.com, INC
The information in this document is provided “as is” without any warranty, express of implied,
including without any warranties of merchantability, and any warrant or condition on non infringement.
This document is current at the initial date of publication.
No portion of this document may be reproduced unless under explicit consent by its authors.

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