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A Strategic Analysis of Amazon.com

Case Study: A Strategic Analysis of Amazon.com in 1997

Overview of the Amazon.com

Founded as Cadabra.com by Jeff Bezos in 1994, Amazon.com was launched in 1995. It is an American electronic commerce company based in Seattle, Washington (Wikipedia 2006). It is one of the first major companies to sell goods over the Internet and one of the most recognized and respected online businesses. It has become the number one online retailer by steadily building its reputation and brand, beginning its operation in July of 1995 (cited in Haddad & Sheth 2001).

Moreover, it has expanded from its existing business of selling books to selling a wide variety of products such as DVDs, music CDs, computer software, video games, electronics, apparel, furniture, food and more (Wikipedia 2006). Similarly, Amazon aside from its domestically shared market also set up four other separate online stores in the United Kingdom, Germany, France and Japan, thus shipping globally on selected products (cited in Haddad & Sheth 2001).

Overview of the Online Industry

The population of the Internet and World Wide Web has raised fast since 1990s with the development and advancement of computer technologies. Many firms have launched their business through the Internet because of this technology innovation. This resulted in various and widely sales of products in the Internet business. Online buying grows at an amazing rate. Therefore, companies that carry out Internet based business have great opportunities to succeed. Conversely, there is a greater competition and threats are all around considering that many companies had entered the online business (cited in University of Texas at Dallas.com n.d.).

Amazon.com vs. Other Online Bookstores

Book retailing is one of the flourishing industries. Barriers to entry into this industry are quite high and suppliers have modest influence over booksellers. The introduction of the internet has brought about many changes to this industry because it has increased rivalry, buyer power and substitutes (American Booksellers Association 2002).

The largest market for books is the United States. Before, book publishing is still fragment, thus high percentage of publisher’s sales occurs through the wholesalers. However, with the emergence of superstores like Barnes & Noble and Borders.com which are directly supplied with more than 95 percent of books from the publishers such percentage decreased (American Booksellers Association 2002).

Since these stores can reduce intermediates like wholesalers, they can sell their products at a discounted price. Because of this strategy, their sales growth rate raised to 71 percent compare to 4 percent sales of non-superstores. In addition, according to their self-report, they are growing almost 25 to 35 percent a month. Many independent stores have gone out of business because of this happening. Such scenarios are the threat to the success of Amazon.com (American Booksellers Association 2002).

It is necessary to understand the book industry as a whole and the competitors in order to remain competitive in the market. Two of the Amazon.com largest competitors are Barnes & Noble and Borders.com.

Book Retail Industry Analysis

The book retail industry was expanding at a phenomenal rate during 1970's and 1980's. New stores were opening and growing into markets previously not served by any bookstore. The number of new books published each year grew because new authors increasingly found their way into print. Similarly, the profit for publishers rose in robust percentages. The book retail industry began evolving into the maturity stage of the industry life cycle in the mid of 1990s. Mark Domnitz, ceo of American Bookseller Association, predicts that Internet book purchases will grow exponentially over the next few years (cited in University of Texas at Dallas.com n.d.).

Porter’s Five Forces of Competition framework such as competition from substitutes, entrants, rivals, supplier power, and buyer power is a valuable tool in analyzing the industry (cited in University of Texas at Dallas.com n.d.).

Substitutes

Substitutes for reading include watching television, going to movies, renting movies, listening to CD's, tapes or the radio, playing computer or video games, talking on the telephone, surfing the Internet, playing sports, exercising, etc. Booksellers are conscious of their prices since some of these substitutes leisure activities do not directly cost the consumer like watching television and making local phone calls (cited in University of Texas at Dallas.com n.d.).

Entry

The book retail industry has very high barriers to entry. The capital requirements necessary to establish a bricks and mortar bookstore would be virtually impossible for a newcomer. Consumers know the big name players. High product awareness and large marketing budgets make it very difficult for new entrants to enter into this industry (cited in University of Texas at Dallas.com n.d.).

Rivalry

Looking at the entire book retail industry, competition is quite diverse. A consumer could purchase books from a bricks and mortar store, which could be a large chain, a non-book retail store, or a small independent store. A consumer could also choose to buy their books on-line. With the onset of Internet bookstores, price is even more of a factor in consumer book purchasing (cited in University of Texas at Dallas.com n.d.).

Buyer Power

Buyer power in the book retail industry is very high. This fact can be directly associated with the significant amount of substitutes and intense rivalry in the industry. As mentioned earlier, if a consumer is looking to purchase a book he/she has many options. The amount of buyer power ultimately depends on the need or desire for the book (cited in University of Texas at Dallas.com n.d.).

Supplier Power

Supplier power in the book retail industry would be considered moderate. Book retailers can purchase books from over 1,700 publishers as well as wholesale distributors. Publishers have control over the distribution of titles (through copyright protection), the list price and the retailers' cost price. These limitations do afford the publishers some supplier power over the book retailers (cited in University of Texas at Dallas.com n.d.).

Amazon.com Competitors’ Analysis

Two of Amazon’s largest competitors are the Barnes & Noble and the Borders Group, Inc.

Borders Group, Inc. is the second largest operator of book and music superstores based on sales and number of stores. It offers customers over 650,000 titles and 10 million book, music and video items in stock and ready for immediate shipping from Border’s distribution center (Durkin, MA, Kass, C, Modi, T & Ulin, M 2000).

Barnes & Noble is the largest bookstore chain in the world. . From its fledgling beginning of one store in 1971 Barnes & Noble acquired and ran several mall based bookstore chains including B. Dalton Bookseller, Doubleday Book Shops and Scribner’s Bookstores. It carries a range of 60,000 to 175,000 titles. In 1997, Barnes & Noble once again expanded its operations to make books available to customers through the Internet (Durkin, MA, Kass, C, Modi, T & Ulin, M 2000).

Several aspects of these two largest competitors posed a threat to the company. Barnes & Noble launched its online store in 1997. If it succeed because of its unique operating channels such as the retail stores, the Internet, 1-800-THE BOOK and mail order, it would capture some of initial customers and develop some brand loyalty (Durkin, MA, Kass, C, Modi, T & Ulin, M 2000).

On one hand, Borders.com has offered books, music, CDs and videos. Such actions would be also a threat to Amazon.com because the company expanded its product line to include music. Thus, it is expected that the competition between Amazon.com and Borders.com will be increased sharply in the diversified products market (Durkin, MA, Kass, C, Modi, T & Ulin, M 2000).

Analysis of Amazon.com

Amazon.com identifies the key success factors in its business model such as a strong brand, providing customers with outstanding value and a superior shopping experience, massive sales volume and realizing economies of scale (Durkin, MA, Kass, C, Modi, T & Ulin, M 2000).

Amzon.com is the only bookseller in the world’s top 500 websites, according to Media Metrix. Additionally, according to one analyst report, Amazon.com is estimated to have over 80 percent of the online bookstore market (cited in Durkin, MA, Kass, C, Modi, T & Ulin, M 2000).

However, Jeffrey P. Bezos’ vision, founder of Amazon, has evolved much further than just being the earth’s biggest bookstore. The vision is to be the world’s biggest one place-shopping stop for online shoppers and to become a premier general online retailer by leveraging its existing brand and business model (cited in Durkin, MA, Kass, C, Modi, T & Ulin, M 2000).

Amazon.com has several core values which play a crucial part in the success of the company. The first one is excellent customer service based on extraordinary technology. The company provides various services such as book reviews from other customers and from staff. In addition, many featured books contained descriptions, snippets of reviews and interview posted by authors (Durkin, MA, Kass, C, Modi, T & Ulin, M 2000).

Convenience and price is the second core value of the company. It sells books through Internet and has its own distribution system. Similarly, Amazon does not have to spend too much money on real state and other operation because it is pursuing Internet-based business. Thus, it can reduce its inventory expenses (Durkin, MA, Kass, C, Modi, T & Ulin, M 2000).

On one hand, the company has several key resources and capabilities to meet the challenges presented by opportunities and threats. These resources and capabilities have thus far allowed the company to be the world leader in the special retail industry. Jeffrey P. Bezos, founder and chairman of Amazon since 1994, is the driving force behind the company. He is a valuable resource that gives the company the competitive advantage with above-average return (Haddad, N & Sheth, J 2001).

Amazon.com has also a very strong brand name presence in the online-retail market which is primarily due to their successful exploitation of their ‘first-mover’ advantage. It would be able to leverage this brand name as it realizes its plans for expansion in the future (Haddad, N & Sheth, J 2001).

In addition, the technological infrastructure of the company also gives its competitive advantage against the other rivals. It can pen a new store which has different products very easily because its core shopping technologies are easily re-usable (Haddad, N & Sheth, J 2001).

On one hand, its website is elegantly designed, easy to navigate and quick to load. It also has numerous proprietary inventions like the click shopping, personalized recommendations and user rating which make shopping more pleasurable (Haddad, N & Sheth, J 2001).

The four strategies such as outsourcing strategies, strategic partnership, compelling value, and active advertising (see Exhibit 1) implemented by the company have contributed to its success in sales growth and cost efficiency (Haddad, N & Sheth, J 2001).

However, transitioning the company culture is one of the problems and weaknesses may face by Amazon.com. A lot of changes have to be made in order for Amazon to adjust to different situations especially since the rules of business keep changing rapidly. Amazon was only a start-up few years ago but it grew rapidly and successfully in the online retailing business. Thus, Amazon is no longer can be considered a start-up but a company moving from one culture to another because of its expansion and time in the industry (Durkin, MA, Kass, C, Modi, T & Ulin, M 2000).

Another is the financial difficulties brought about by its international exposure. The fluctuation of exchange rates from different currencies into U.S. dollars may affect Amazon's money market. The success of Amazon’s international expansion also depends on local economic and political conditions (Durkin, MA, Kass, C, Modi, T & Ulin, M 2000).

Conclusion

Amazon has grown admirably from its initial beginnings as a small online bookseller to a giant superstore company. During this process of rapid growth, it has incurred significant losses and it becomes more expose to a greater competition and threats. Cutting costs and achieving profitability remain Amazon's greatest challenges. However, there are key factors such as a strong brand, providing customers with outstanding value and a superior shopping experience, massive sales volume and realizing economies of scale which contribute a lot to the success of this company. These factors and the people around the company help Amazon.com to face the threats pose by other online bookstores. Essentially, the company should aim to maintain its gross margins in its existing business and in future product lines such as music CDs and videos. In order to do this, Amazon.com should develop strategic partnerships with all of its main suppliers.

Exhibit 1: Amazon.com Company Strategies

Outsourcing Strategy Amazon.com has purchased majority of its products from two major wholesalers, Ingram Inc., and B&T, which enabled Amazon.com to have less, inventories and reduce internal overhead such as operating expenses.
Strategic Partnership Amazon.com has established long-term relationships with Internet companies to become a premier merchant on the Internet: America Online, Yahoo!, Excite, Netscape, GeoCities, AltaVista, @Home, and Prodigy.
Compelling Value Through the innovative use of Internet technology, Amazon.com was dramatically able to lower the price and provide enhanced selection, high-quality content, a high level of Consumer service, and personalized service.
Active Advertising Amazon.com has spent a large portion of its expenses to strengthen the brand name. For the years ended 1995, 1996, 1997, the company incurred advertising expense of $30,000, $3.4 million, $21.1 million, respectively.
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