Amazon E-Business Strategy

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Amazon is one of the most well-known online retailers. The company has managed to go from strength to strength throughout the last decade, relatively unaffected by external shocks such as the dot com bust and the current recession. This report analyses the e-business strategies employed by the company and its emarketing, web design, B2B and customer service strategies. The report concludes with a recommendation for future strategies that the company can adopt.

1.0 E-Business Background

1.1 About the Company

Amazon is a leading online retail company. It was started in 1995 by Jeff Bezos as an online book company and has evolved into a provider of various different types of consumer goods such as books, apparel and electronics products.

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Fig. 1.1 below shows the Porter’s Five Forces analysis. The spread of the Internet and related developments lowered the barriers to entry which allowed Amazon to enter the market in 1995. At that time, books were printed by the publishers, passed to distributors who sold it to the shops. The customers had to go to the shops and buy the books. Amazon spotted that with the Internet, one large online store would allow it to present a storefront to customers all over the country, as well as eliminate the need for distributors. Thus it was able to build a successful business based on this strategy.

In order to continue its dominance in the market, Amazon had to continue to keep its hold onto customers as well as fend of threats from competitors. In order to do this, Amazon relied on technology even further to keep its stranglehold on the supply chain. It pioneered e-books through its proprietary Kindle technology, which comprised of both hardware and software (Amazon, n.d.). This leveraged on its vast selection of books but also took advantage of the developments in hardware technology which facilitated reading from the screen as well as developments in software technology which allowed its customers to purchase and download ebooks wirelessly over the Internet. Kehoe and Boughton (2001, pg. 582) state that it is important for the supply to be able to obtain information about the demand and supply capacity, and total vertical integration is a good way to achieve this.

As Porter( 2001, pg. 1) states, the Internet is no more than a tool-but a powerful one that can support or damage a firm’s strategic positioning. In order to use the Internet effectively, a firm has to integrate it into its overall strategy and operations. Amazon has been able to successfully do this; from its newer products such as Kindle to its software and other technical services and products. The company has effectively used new technologies to complement its established modus operandi, and also to continually create an advantage for itself. Its Kindle product is a particularly strategic one – with Kindle, Amazon will be able to deliver ebooks to customers directly from the writers, eliminating even the publishers in between. Writers can sell their creations to Amazon who can format it in the form of ebooks, and sell it on to customers. Adebanjo (2008, pg. 45) stresses on the importance of maintaining control over the supply chain in order to dominate the market, and this is exactly the direction Amazon is heading to – total control over the supply chain.

Threat of Substitutes

Degree of Rivalry

Buyer Power

Barriers to Entry

Strong

Supplier Power

Weak

Diverse suppliers

Porter’s Five Forces

Fig .1.1 – Porter’s Five Forces

1.2 SWOT

The company’s strengths lie in its online retail format, wide range of products and services sold, and its geographical reach. The Internet is key in allowing the company to reach a wide geographical presence. Whereas traditional companies such as Wal-Mart would be required to establish a physical storefront, warehouse and distribution operation, Amazon only needs a warehouse and a website to serve customers in a country. This makes it very easy for the company to expand into new markets. However, it has to face stiff competition from other internet retailers. In this scenario, it is also difficult for it to maintain its free shipping offers.

Strengths

Leading online retail format

Wide product and service offering

Geographical presence in key markets

Robust financial performance

Weaknesses

Free shipping offers

Moderate Credit Rating

Opportunities

Increase in online retail sales in the US

Business expansion through acquisition

Partnership with Google

Threats

Intense competition

Declining consumer confidence

Foreign exchange fluctuation

Table 1.1 – SWOT Analysis

The main opportunity the company has is to expand its business through acquisition. It has many acquisitions – from the online shoestore Endless.com to DVD rental company iLOVEFILM, etc. It has also established several strategic alliances such as with Toys R Us to form the Babies R Us brand name, with the Virgin Entertainment Group for Virgin Megastores, with the Borders Groups to offer the Amazon ecommerce platform, etc. (Datamonitor, 2009).

1.3 PEST analysis

PEST analysis is a scan of the external macro-environment in which Amazon exists. It is a useful tool for understanding the political, economic, socio-cultural and technological environment that Amazon operates in. It can be used for evaluating market growth or decline, and as such the position, potential and direction for a business.

Political factors. These include government regulations such as employment laws, environmental regulations and tax policy. Other political factors are trade restrictions and political stability. The main regulations governing e-commerce in the UK. Needless to say, businesses engaging in e-commerce need to comply with the law governing traditional physical world transactions such as the Sale of Goods Act 1979, Supply of Goods and Services Act 1982, The Unfair Contract Terms Act 1977, The Unfair Terms and Consumer Contracts Regulations 1999, The Consumer Protection Act 1987 and so on. In addition, they must ensure that they comply with an array of regulations governing the actual on-line trading process. These are mainly as follows:

The Consumer Protection (Distance Selling) Regulations 2000 as amended by the Consumer Protection (Distance Selling) (Amendment) Regulations 2005 – commonly known as “Distance Selling Regulations”

The Electronic Commerce (EC Directive) Regulations 2002 (“E-commerce Regulations”)

The Electronic Signatures Regulations 2002

Overall Amazon has complied fairly with all these regulations and these regulations seem to keep online consumers and businesses safe.

Economic factors. These affect the cost of capital and purchasing power of Amazon. While the economy is showing sluggish growth due to recession, online sales from Amazon have still been stable due to its cost effective business model which results in best prices for consumers.

Social factors. Overall the reach of internet in the UK has been on an increase followed with online sales. Online leaders like eBay have further increased online sales thus converting more users into online customers.

Technological factors. While the barriers to entry are limited in this business due to the simplicity of an online business, Amazon has lead over new businesses given its strong customer support and brand in the market which is followed by secure payment gateways.

Four corner’s analysis

The ‘four corners’ refers to four diagnostic components that are essential to competitor analysis: future goals; current strategy; assumptions; and capabilities. Understanding the following four components will predict how a competitor may respond to a given situation.

Motivation – drivers. In the ebusiness market place the strategies of Amazons competitors are quite situation specific and tends to change given the changing nature of consumer behavior in online sales. Hence competitor strategy is changing with every trend in consumer behavior.

Motivation – management assumptions. Assumptions within Amazons competitors like eBay or Buy.com are known to be versatile sellers who can cover broad range of consumer or industrial goods however there is a sharp difference in the type of goods purchased from specific sites or as preferred by consumers. For example sales in eBay are more skewed towards electronics or household goods while Amazon leads more in books, music and its new electronic device Kindle.

Actions – strategy. Within a market place like ebusiness, competitors are every changing their strategy which quite differs from their strategy in annual reports or websites. eBay has seen a regular change in its seller rules which is now more ‘buyer’ protecting. Similarly for other upcoming ebusinesses like gumtree.com, the strategy is based on regional consumer behaviour in the UK. Thus we are assuming that the strategy of competitors is changing with the trends and Amazon needs to keep clear watch on consumer behaviour online through various angles like demographically, gender wise, age etc.

Actions – capabilities. In terms of capability, Amazon is well networked with suppliers as well as in the online space with consumers to create its strategies into effective actions. The company is financially well equipped for large scale marketing initiatives.

Value chain analysis

Value chain analysis is based on the principle that organisations exist to create value for their customers.

Amazon decided at the outset to build its own warehouses in order to increase the speed and reliability of its delivery of online orders. Amazon has sought to add value in the sales and fulfillment activities, seeing this as a core competency (Amit & Zott 2001). However, the investment in new facilities required to serve new markets or to offer a step change in capacity have carried a crippling cost, and indeed Amazon has closed several facilities where capacity has been under-utilised. More recently, Amazon has adopted a more flexible approach and also acts as a marketplace for other sellers that supply other goods and services alongside its own, even offering lower prices from other suppliers on goods it sells itself.

Of course, with greater analysis and experience of these markets, it has been found that to serve markets in volume, whilst there may have been disintermediation, there has also been reintermediation. Businesses like Amazon have had to build new distribution capabilities that have been by no means cheaper than traditional methods.

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Discuss the challenges of adoption of e-business in relation to the company. For your chosen company evaluate pure-online business, pure-physical business and a combination of both. Also provide your suggestion to the company to choose a suitable method based on your evaluation. –

eMarketing can be said to be the marketing strategy of a firm that is executed online. Perhaps the single most important emarketing strategy that Amazon has adopted is the use of its own name for its domain name. The boom on the Internet means that anyone with any knowledge of computers and the Internet knows that a .com means a website. Thus anyone looking for Amazon the company online is highly likely to try Amazon.com, which is the company’s website. One of the main characteristics of emarketing is that it is highly diffused in nature – Krishnamurthy (2006, pg. 52) explains that there is no online equivalent of marquee event such as the Super Bowl on television. Such events get a very high amount of attention on television, and therefore a prime targets for display of advertisements. Companies must therefore adopt a range of online channels to market their products. Chaffey et al (2009, pg. xiii) concur.

Google can be considered to be the nearest online marquee, but there are two big qualifications in such a statement – firstly customers must go to Google to search for something, and secondly, any advertiser can bid higher for keywords in order to achieve a better placement for its ads. As Google’s advertising system is dynamic in nature, the company that wants its advert to be on the top always will have to be vigilant and proactive, constantly monitoring competitors for its keywords. Furthermore, simply concentrating on Google is not sufficient as an emarketing strategy for Amazon – it also has to strive to imprint its brand on customers that do not use Google. As Krishnamurthy (2006, pg. 52) recommends, Amazon must take advantage of other forms of technologies such as social networking sites and mobile computing to allow for different marketing possibilities. In this area also, the company has been proactive, creating Facebook applications that allow users to maintain wishlists that are seen by their friends. The company therefore been able to use the Internet prosumer (as described by Fuchs, 2009, pg. 69) in order to capitalize on Web 2.0.

One key point about emarketing raised by Pires et al (2006, pg. 936) is that the “increasing use of information and communication technologies (ICT) is shifting market power from suppliers to consumers”, resulting in the “unintended consequence” of consumer empowerment. Amazon has successfully incorporated consumer empowerment in its emarketing strategy through its reseller platforms which place small competing business’ products side by side, but also cunningly being able to take a profit from each sale by a small competitor.

As mentioned in the previous section, one of the main marketing strategies that Amazon has adopted is to offer a wide range of products to its customers. This allows the company to leverage on its presence on the Internet. However, this strategy also creates a big challenge in designing its website. The company has to have a website that is able to sell many different categories of products and services, and yet be useable by the lay user. Appendix 1 shows a screenshot of the company’s website taken on 2nd December 2009. It can be seen that Amazon attempts to manage the presentation of the diverse products by arranging them according to departments, much in a similar manner to a normal superstore. However, it has a major disadvantage in that where traditional superstores are chock full of products that provide visual guides to customers as to where the products may be located, Amazon has plain text to tell its users which are its departments. This means that a user looking for a product has to first determine which department that product may be and go hunting for it. If it turns out that the user has got the wrong department, he may have to search again. The website does have a search facility which is prominently displayed at the top. However, this may not always turn up the right product(s). Furthermore, the website has the word ‘go’ displayed on its search bar, which may be counter-intuitive to people who are used to the word ‘Search’ on Google’s search button.

The website’s search function is also geared towards books, with books of the same title turning up instead of the different products. The search engine is also not good at mis-spelt words, hyphenated words, etc. Nielsen (n.d.a) explains that such search engines are particularly difficult for elderly users, but they hurt everybody.

In relation to the company, evaluate the Critical Success Factors (CSFs) for E-business success in current economic downturn. – 20 Marks

Amazon’s B2B strategy has two prongs – one to place competitor’s products alongside its products through its reseller platform, and two, to form strategic alliances with other businesses to launch different brands.

As discussed previously, customer empowerment is a key feature of ecommerce. With a few clicks, customers can skip from one website to another. The key to retaining customers in this scenario is to ensure that the customers are provided with everything they want in the site. Price comparison sites are the best of friend of today’s savvy customers. Amazon has muscled in on this side of the business through its reseller platform. By providing resellers a space on its main website, the company is providing the small businesses a space on a highly known website. This is a very attractive advantage to many businesses. Amazon also gains by this arrangement in two ways -it makes a profit when the reseller makes a sale, it also keeps hold of savvy customers by not letting them leave the website. Other big competitors have truly lost out on a major opportunity in this case.

Amazon’s second B2B strategy of making strategic alliances is however slightly flawed in that it is weakening its main brand name by creating many more smaller brand names. Just as Wal-Mart has begun to coffins, and Tesco broadband, Amazon should be able to easily expand its product range without losing its place at the helm of Internet ecommerce. However, the company has neglected to do this. Its shoe store, Endless.com is a prime example of a line of product that could have been included under the Amazon.com banner – if Amazon.com already sells apparel, why can it not sell shoes? Endless.com has in fact become a competitor to Amazon.com, thus weakening the company.

Critically evaluate the BIG E-business ladder in relation to the current e-business models and how it can be enhanced to include new and innovative businesses. – 20 Marks.

Amazon’s customer service philosophy is built on three customer experience pillars – low prices, vast selection, and fast, convenient delivery (Amazon,2009a). The company expects that these needs will not change in the long term. The company’s business strategy is revolved around strengthening its ability to deliver these three things to customers. It expects that by developing a reputation for selling everything at the cheapest price and quickest delivery it will be able to garner repeat business. Hence it is willing to take a smaller profit margin with individual items in the hope that the volume of sales will allow it to make sufficient profit.

The company’s customer service strategy is a circular, self-depending one. A company that wants to sell its goods at low prices will have to rely on generating a large volume of sales. A company that expects to have a large volume of sales will have to offer a vast selection of items, as it cannot expect customers to buy the same things over and over again. Brynjolfsson et al (2006, pg. 68) explains that customers have a greater depth of preferences that can be served by a physical storefront, and Amazon has capitalized on this fact. Its intertwined strategy is similar to that adopted by Wal-Mart and Tesco. However, Amazon is different in that it is doing business over the Internet. This makes its strategy for the delivery of goods to customers necessarily different. Where Wal-Mart and Tesco have to attract its customers by convenient parking and strategic locations, Amazon has to attract customers to its website and ensure that it has a good delivery system. The necessity of having a good delivery system forms the third part of the company’s strategy of price, selection and convenience.

Low Prices

Vast Selection

Efficient Delivery

Fig. 5.1 – An intertwined customer service strategy

Amazon (2009b) states that it expects that its spending in technology and content will increase over time, in order to facilitate category expansion, editorial content, buying, merchandising selection, and systems support. The company also plans to maximise the value of its investment by also using technology to provide wider and better seller platforms, web services, digital initiatives, and expansion of new and existing product categories. This shows that technology is at the core of the company’s business strategy, and will remain so for a long time. The company has adopted a long term business strategy, which has seen it through difficult times. Hence it must be said that the company has been very effective at developing and implementing business strategies that depend on technology.

One of the key areas that the company can improve is in the usability of its website as well as branding. As discussed previously, the company has initiated several strategic alliances which have resulted in new ventures that have been branded with different names. The use of different brand names may be a business strategy or a result of expediency, but it represents a loss to the Amazon brand image. Customers today are able to embrace the fact that one brand name can sell anything – the success of Teso and Wal-Mart around the world proves this. Product diversification is a key technique to remain relevant, especially on the Internet – even Internet giant Google is not relying on its core products such as Adwords and AdSense. Google continually releases new products, such as the recent Google Wave (InformationWeek, 2009). This shows that product diversification under the main brand name is key to attracting new customers. Amazon is no longer just an online book seller, and it needs to put this message to customers by launching major new product lines.

The expansion onto the Internet of giant real-world retailers such as Wal-Mart and Tesco is a significant threat to Amazon. Almost all the products that can be purchased at Amazon.com can now also be bought as Tesco.com or Asda.com. Hence Amazon also needs to expand and strengthen its B2B strategy in order to compete with these giants. Its B2B strategy will help it maintain its niche online and be known to customers as the cheapest and best place for goods online.

References

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Amazon, 2009b. Letter to Shareholders. Available at: http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9MjAyOHxDaGlsZElEPS0xfFR5cGU9Mw==&t=1 [Accessed December 2, 2010].

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