Business model of amazon

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Business model of amazon

  1. 1. Business Model of Amazon.comhttp://www.indiainfoline.com/bisc/ford1.htmlAmazon.com is the pioneering bookstore on the Internet that first opened in July 1995 by Jeff Bezos.The firm offers online shopping services and partnership opportunities such as online search forbooks, music and video items. The products that they sell include an array of audio, video and booktitles. Amazon has one of the widest selections and employs international shipping to virtually everycorner of the globe in just a few days.Amazon’s focus is having the biggest selection of free-electronic greeting cards, online auction andmillions of books, CDs, videos, DVDs, toys and electronics. They have expanded to different areas ofthe world, such as Amazon.co.uk and Amazon.de, to service consumers outside of the United States.They aim to be a Cost leader in which their firm has lower costs than the competitors. They haveemployed different Amazon branches in different parts of the world to lower costs. This allows Amazonto ship their products at a lower price from each point of shipment to the consumer.In recent years, Amazon.com has expanded from being just an online bookstore to an all aroundonline shopping experience. They have coined the tag line "Earth’s biggest selection". Amazon hasdiversified into different websites. These are the Internet Movie Database (www.imdb.com),LiveBid.com, amazon.livebid.com, drugstore.com (an online retail and information about health andwellness), gear.com (online sporting goods company), homegrocer.com (online grocery shopping anddelivery), pets.com (largest pet supply online shopping site), ashford.com (online luxury and premiumshopping) and eZiba.com (online retailer of handcrafted products).Five Forces Model for Industry AnalysisNew EntrantsThe online bookstore industry that Amazon.com has pioneered in was, at first, very hard to penetrate.There were different barriers such as distributing capabilities and the variety of the selection offeredthat are supposed to be hurdled. Amazon successfully solved the tricky parameters as being the firstone to get into the whole idea of online retail. With being the first, they had the luxury to set what werethe norms for the industry. Factors that may lower these barrier tactics would be a wider selection andthe ability to go to an actual bookstore to exchange or return books or other products. This network of"actual" retail spaces makes it easier for the consumer to return or exchange the products they werenot satisfied with. These handicaps of Amazon were the basis for the emergence of book retail giantsBarnes and Noble and Borders in the online shopping industry.Industry CompetitorsThe major competitors of Amazon are Barnes and Noble and Borders. Barnes and Noble is a retailgiant offering books and CDs both in their outlets all over the country. It opened their online industry in1997 and has become the fourth largest e-commerce sites today.Focused largely on the sale of books, music, software, magazines, prints, posters, and relatedproducts, the company has capitalized on the recognized brand value of the Barnes & Noble name tobecome the second largest, and one of the fastest growing, online distributors of books. Their"advantage" to Amazon is the brand name and the availability of actual retail outlets in whichconsumers could go in to exchange or return products easily. They also have an established bookselection based in their retail operations.Borders is another multi-media retail store found in major cities around the country. Started out as asmall bookshop in the college town of Ann Arbor, Michigan, it has since expanded into one of thefinest bookstores. In 1992, Borders was bought by the Kmart group which further flourished thecompany into a Multi Media Giant with a wide selection of Audio, Video and Books found throughoutthe United States.
  2. 2. The Online Bookstore industry have become a fierce business which involves discounts, variedselections and fast delivery in which all three companies are challenging each other.BuyersThe consumers of this industry can be found in every corner of the population. These are mostlypeople who have had some form of higher education and have access to the Internet and computers.The segment of online shoppers has increased dramatically in recent years due to the convenience ofshopping in the comforts of the home and the accessibility of the Internet. These developments havemade it easier for consumers to log on and buy on the Internet. Consumers also tend to compareprices among the retail leaders such that buyers are able to buy products with very big discountscompared to ones bought in "actual" retail outlets. The bargaining power of the consumer is based onthe competitive strategies of each active firm in the industry. Thus, consumers can challenge one firmfor charging more than the other one such that the firm will beat the price of the competing firm.SuppliersAmazon’s suppliers range from the publishing and media houses to electronics’ manufacturers.Amazon buys all their books, videos and audio CDs from the multi media houses and publishing giantssuch as Time Warner, Doubleday etc. Amazon also has alliances with other bookstores to coverorders that they cannot serve.SubstitutesThe substitutes for Amazon and other online bookstores are the "actual" book retailers and musicstores such as Barnes and Nobles, Virgin Megastore, Tower Records, Sam Goody and other smallmom-and-pop outlets. With the rise of online retail, there will be little impact from these substitutes.One impact would be some consumers who would like to hold or listen to their purchases prior tobuying and those who are into the whole "shopping experience". Barnes and Nobles have jumped intoonline retail and have succeeded into diversifying into the new e-commerce industry.Industrial Organization ModelDegree of CompetitionDue to the shift of focus for Amazon, it has become the "Earth’s biggest anything store". Itscompetitors have expanded from just online book retailers Barnes and Nobles and Borders to topaudio retailers CDNOW.com and online auction house EBAY.com. Amazon has an overall lead of40% market share against the other online retail firms. Their international business has more thandoubled over the past 2 years and this growth increased Amazon’s share in the online businessmarket.Life CycleAmazon, in it’s first years, had negative income but the rise of e-commerce sites and being the pioneermade the succeeding years led to boom time for them. Their growth period was during 1994 to 1995when they were the first of its kind in the world. They incurred very high costs in terms of distributionsto customers. Still with a negative income, Amazon went public in 1997 and had one of the biggestIPOs of the time. With investors banking on future positive cash flow for this company, Amazon’smarket value soared. Many people caught on with the idea of online shopping, thus, Amazon’ssuccess. Amazon’s success as an online retailer prompted bricks-and-mortar rivals Barnes and Nobleand Borders to join in. Competition decreased Amazon’s profitability so in the past couple of years,Amazon has expanded to more than books, audio and video to electronics and other retail concepts.Social Relevance
  3. 3. Amazon’s products are marketed for every consumer possible. Books, audio, video and electronicsare appreciated by majority of the population especially those who have access to the Internet.Amazon is active in pursuing literacy programs for young children by collaborating with the makers ofthe Dr. Seuss books. They have actively participated in the Dr. Seuss shops, story telling sessions andDr. Seuss days.Degree of GlobalizationAmazon’s strength internationally lies within its networks in major ports and cities around the Globe.Amazon first started out in Seattle but as soon as they have established a niche market, they haveopened shop all over the nation and in cities such as London, Berlin, The Hague, Paris, Tokyo,Singapore and many more. These branches overseas improves their delivery service to a wideconsumer base.Extent of Government ControlThere has not been many government regulations regarding online retailing. A group of CEOs whosefirms that are engaged in such practices have formed an organization called Global BusinessDialogue. This GBD group supports the development of a seamless global system that delivers thebroadest array of goods and services to the largest number of consumers at the most competitiveprices. This work effort will: offer recommendations to the WTO, including making the moratorium ononline tariffs permanent; and collaborate with governments to target and eliminate discriminationsagainst, or other non-tariff barriers to global trade in, electronic commerce. This working group will alsoprovide an avenue for the GBDs to consider and promote the growth of the electronic marketplace inan environment unencumbered by detrimental taxation.Degree of Vertical IntegrationAmazon’s primary value chain includes purchasing/sourcing, marketing, distribution and after-salesservices, which includes returns and exchanges from unsatisfied customers. Their main focus is in thepurchasing/sourcing and in the distribution of the products to the consumers. Their investments aretherefore, geared towards warehouses in key points of high consumer demand areas and an efficientdelivery and distributing system to service all its consumers. Thus, Amazon controls most of itsdistributing system that spans across borders.Inter Organization of Network EconomicsAmazon in its efforts to sustain its market leadership in the online retailing industry has tied up withvarious online organizations. Netscape Navigator and Amazon will offer members of NetscapeNetcenter a co-branded storefront where Earths Biggest Bookstore will be easily accessed throughNetscape Netcenter (home.netscape.com). In addition, Amazon.com has multi-year exclusive andpremier bookseller relationships with 5 of the top 6 sites on the World Wide Web: AOL.com, Yahoo!,Netscape, GeoCities, and Excite. These partnerships widen Amazon’s presence in the World WideWeb.Sensitivity to Business CyclesThe Online retailing business has a very quick cyclical growth. Amazon being one of the firsts toventure in this type of commerce are all ready in what seems to be in their decline stage where marketshare is declining. Therefore, Amazon is expanding to different industries within online retailing.Amazon and other online retailing firms are very sensitive to business cycles due to the speed oftechnology involved in the services they offer.Dynamics of New Knowledge GenerationOnline retailing relies on the work of an excellent distribution system. Amazon has invested theirmoney into expanding their network of distribution centers around the globe. They also have
  4. 4. investments in creating better technology for tracking orders and giving efficient delivery systems fortheir customers.Amazon.com has remained on top of the online retailing business despite the entrance of giants suchas Barnes and Nobles and Borders. Their success is attributed to two factors; timing and continuing toinvest heavily into the inventory and distribution systems. Amazon, by being the first of its kind, has abig lead over the nearest competitors due to their experience and its reputation as the first movers.Their thrust remains on improving efficient delivery systems across borders and to build namerecognition as the number one retailing firm in the Internet. They have also ventured into different retailoptions to keep that lead. Marketing, Innovative inventory and distribution systems, and name recallhave helped Amazon build a sustainable competitive advantage.In order for any online retail company to remain prosperous and income generating, they must invest alot of time and money into research and development of more efficient operations and distributionssystems. This proved to be key for the Market Leader in online retailing, Amazon.Com.Mary Grace Velasco,College of Business Administration,Senior, Fordham University,Fall 2000

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