Company Background
In 1994, Jeff Bezos, one of the pioneers of e-commerce, left his job as vice president for the Wall Street firm D.E. Shaw, picked up and moved to Seattle, and began to create a business plan that would soon become Amazon.com. Bezos knew that the Web was projected to grow substantially, so he developed a list of 20 products that could be sold on the internet. He took that list and narrowed it down to the five most promising: compact discs, computer hardware, computer software, videos, and books. Bezos came to the conclusion that his best seller was going to be books, due to the large worldwide market for literature, the low prices that could and would be offered for the books, and the tremendous selection of titles that were available in print. He decided that he would have his company’s headquarters be located in Seattle, WA because there is a large high-tech traffic workforce and it is close to a large book distribution center in Oregon. Bezos worked to raise the capital to help fund his start up, also working with web developers to build the company’s website. The website Amazon.com was debuted in July of 1995 and quickly became the number one book-related sales sites on the Internet.
After just four months in operation, Amazon.com became very popular on the Web. The company created a database of over one million different titles, allowing the customer to search for desired titles. The program displayed information about the title on their computer screens, and gave them the option to order the book with a payment done online and have the books shipped within a matter of days. Unlike Amazon.com’s large competitors, they only carried roughly 2,000 different titles in stock in their Seattle warehouse. Most of the orders were placed directly through wholesalers and publishers, so at that point in time there was no need for a warehouse. Amazon.com would receive the books from the outside sources and then ship them to the customer. Amazon.com started to blow up and turn into something big on the Internet in such a short period of time. Within a month of launching the site, Bezos and Amazon.com has filled orders from all 5o states and to 45 other countries.
In 1997, after only two years of operation, Amazon.com became a publicly traded company with three million of shares of common stock. Throughout the years Amazon.com continues to grow and add departments to their online empire. For example, in June of 1998 Amazon.com decided to venture into the online music market opening with over 125,000 music titles. Amazon.com has contiuned to grow and now has 19 different departments offered on their website. These departments include: (1) Amazon Video, (2) Fire TV, (3) Home, Garden & Tools, (4) Sports & Outdoors, (5) Amazon Music, (6) Echo & Alexa, (7) Beauty, Health & Grocery, (8) Automotive & Industrial, (9) Appstore for Android, (10) Books & Audible, (11) Toys, Kids & Baby, (12) Home Services, (13) Kindle E-readers & Books, (14) Movies, Music & Games, (15) Clothing, Shoes & Jewelry, (16) Credit & Payment Products, (17) Fire Tablets, (18) Electronics & Computers, and (19) Handmade products. Amazon.com still has more to offer to users in the future.
Top Management
Amazon has seven notable individuals who are in top management of the company as well as eleven members on the Board of Directors. Of these, Jeffrey Bezos, President and CEO, Brian Olsavsky, CFO, and Andrew Jassy, CEO of Web Services, are the most significant.
Jeffrey Bezos is the Founder, President and CEO, and Chairman of the Board for Amazon. Bezos’ professional experience is rooted from the initial start of his company to what it has grown to today. He has seen Amazon at every stage and has evolved along with it in overcoming challenges. Bezos’ specific challenge is maintaining the overall success of the company. He is responsible for providing leadership strategies by working with the Board of Directors and other top management to establish the company’s long-range goals, strategies, plans and policies. He is constantly overcoming challenges by reaching into new ventures and improving old ones to stay ahead of their competition.
Brian Olsavsky became the Senior Vice President, Finance and CFO of Amazon in June of 2015. Prior to his success at Amazon, he had experience working for large corporations such as Fisher Scientific, BF Goodrich and Union Carbide, where he held many financial and business management roles as well as financial and operational roles. Now as the CFO for Amazon, he supervises the company's overall financial activities, which include financial operations, analysis, controllership, investor relations, tax, treasury, and internal audit. In his role as Vice President, Finance and CFO, Olsavsky’s specific management challenge is having total responsibility for the finance team, which supports Amazon websites, merchant services, and fulfillment operations and subsidiaries. For several years, Amazon’s profits have been thin. However, they have increased investments in building more warehouses and also investing in Amazon Web Services. Him and his team have overcome the challenges of having thin profits by investing it in other resources to make a bigger profit.
Andrew Jassy is the CEO of Amazon Web Services. Before working at Amazon, Jassy founded a marketing consulting company and also served as a Director for Coupa Software Inc. Jassy is now responsible for the technology infrastructure organization for Amazon. AWS is a subsidiary of Amazon that provides software developers and businesses with cloud-based infrastructure services that are inexpensive and reliable. Before AWS was created, Jassy saw that this could help solve problems for the software engineers, who were spending too much time figuring out the computing infrastructure for each new project. Jassy’s specific challenge is to provide these services to businesses around the world from start-ups to enterprises to government agencies in providing the infrastructure to support their websites, applications, inventory management, and databases. His division has helped Amazon overcome challenges operating its website as the company continues to grow.
Resources and Capabilities
Resources
Global Marketing – Amazon has a hand throughout the world, operating in thirteen countries, in addition to providing global shipping. Unlike other online marketplaces, this provides the company with the ability to reach many more consumers. This allows Amazon to have their third-party sellers all around the world. Due to Amazon being an online entity, their resources go towards perfecting their shipping and delivery services as well as providing the best customer support and as the multi-billion dollar company grows, so does its reach throughout the globe.
Customer Support – One of Amazon’s greatest resources is it’s customer support, the company’s policies on consumer issues is outstanding when compared to other online retailers. When packages are lost or damaged, or whatever issue a customer has with their package, Amazon makes its best effort to have their customer support staff ensure that they do whatever possible to satisfy the customer’s needs. In a situation where your package is lost or damaged, Amazon uses its own money to deliver another product with shipping and handling free–they lose money on this transaction but it ensures customer satisfaction and future loyalty.
Employees – Amazon, being the titan that it is, has over 230,000 employees, employing a significant amount of human capital to their team.
Capabilities
Innovation – The company is constantly reinvesting their profits into formulating new products and services. This allows for the company to branch from their generic retail business into different areas. Although some of Amazon’s recent expenditures on formulating new products have backfired, most notably their short-lived Fire phone or their ever-failing ebook Kindle reader. Amazon has, however, overtaken the online retail industry through its low-cost option for consumers to partake in their Amazon Prime tool. This allows for consumers to avoid compounding shipping costs, in addition to offering free subscriptions to their stock of movies, tv shows, and music. Though Amazon’s revenue is primarily consistent of general retail, its third party sellers, and its other products, Prime is currently one of the most popular options amongst their diverse products. Amazon’s innovation doesn’t stop there, since the company’s inception, the colossal retailer has formulated over 1200 patents on new technology.
Responsiveness to Customer Needs – As stated above regarding how Amazon’s customer support is one of their best resources, it is also one of their capabilities. This allows Amazon to not just be an option when surfing the web for a new pair of socks and instead it allows Amazon to be the choice when it comes to buying that pair of socks. Amazon had noted that shipping is an expensive tax when a person buys products over and over, through their service Amazon Prime, however; it allowed customers to purchase a yearly membership at a very reasonable price that gave not only free shipping but also free two-day delivery along with other benefits. The brainwork that Amazon does allows it to continue to be a titan in its industry, it looks to completely satisfy its customers above all else–as seen by their low prices and services.
Sustainable Competitive Advantages
Amazon’s pricing, shipping policies, and large consumer base make it a very competitive company and a giant in the online retail industry. Amazon’s thin margin allows for the lowest cost to consumers but the company is still able to make profits, unlike physical retailers.Due to the fact that the company has no physical stores, it is able to completely focus on optimizing the efficiency of delivering their product. Strategically placing warehouses around the countries it operates in. In addition to this, Amazon has a deal with the UPS and USPS allowing for the company to have an even bigger edge when it comes to shipping. The size and reach of the company also make it a formidable opponent for other online-retailers to challenge.
Strategy
Low-cost Structure – Amazon’s ridiculously low prices are a feat accomplished by their low-cost structure. This is possible due to Amazon’s large partner network and a lack of competition. Amazon has partnerships, as aforementioned, with the United Postal Services and the USPS, in addition to this Amazon also has partnerships with suppliers and third party sellers. Most notably, however; Amazon’s low-cost structure is able to fruit due to the nature of the online retail industry, there are a lack of actual competitors that are able to match Amazon’s popularity and presence. This is most likely due to the fact that the prices are so low that Amazon’s profits are very low as well, leading to consumers choosing Amazon as their local online retailer—their price is unbeatable. Amazon would be able to increase their profits immensely if they were to increase the prices on their products and services, however; I think it would defeat the belief that Amazon has worked hard to convey and in turn may end up losing loyal customers to rising prices.
Porter’s Five Forces – Online Retail Sales Industry
Entry – Prerequisite needs for entry into the online retail sales industry are relatively cheap and highly available. One can establish a website through GoDaddy or a similar web hosting site, obtain business licensing and purchase enough inventory to get started for a few thousand dollars. This type of operation does not require a large warehouse or any other material investment like other businesses. Also, large profits by bigger online retailers will cause further entry into the market by companies attempting to chase some of those revenue streams. Due to the ease and cost of entry into the market, we ranked Entry as strong (7/10).
Buyer – Buyer power in the online retail sales market is huge. The buyer can easily choose to purchase from different companies. Most often, the goods online retail sellers offer are homogenous and can be purchased from numerous establishments inside and outside the online sales industry. It is very hard to establish customer loyalty in an environment such as this. Thus, we ranked Buyer as strong (8/10).
Suppliers – Inventory, which is required to be an online retailer, can be purchased from a multitude of sources. Since a large variety of goods can be purchased from multiple suppliers, most suppliers of retail goods will be in price competition in order to receive your business. Due to the multitude of possible suppliers in this industry, we ranked Supplier weak (3/10).
Substitutes – Similar to buyer power, the substitution of goods purchased from online retailers is common. Whether one can find a similar product locally, or a cheaper version of the same product elsewhere, it is easy to see why substitute goods can pose a problem for the online retail industry. Brick and Mortar establishments such as Wal-Mart and Best Buy now offer price matching to compete with online retail sellers. Thus, we ranked Substitutes as strong (9/10)
Rivalry – There are countless online retail businesses, selling literally everything under the sun. These companies offer consumers similar interfaces and similar prices. Specialty online stores can sometimes offer things bigger online stores cannot. Many online retail establishments have seen giants like Amazon and Alibaba rake in giant profits each quarter and have implemented strategies to gain market share.
OVERALL ATTRACTIVENESS – Since many of the forces are strong, we would rank overall industry attractiveness low due to the ease of entry, number substitute availability of goods, strong rivalry and possibility of further encroachment into the industry by newcomers chasing profits (2/10)
SWOT Analysis
SWOT is an acronym for strengths, weaknesses, opportunities and threats. Strengths and weaknesses are part of the internal structure of the company. Opportunities and threats are external to the company and haven’t happened yet. SWOT analysis of Amazon is as follows:
Strengths
Low-Cost Structure – Amazon has a very low cost structure compared to other retailers in their revenue bracket. Amazon’s direct competitors are brick and mortar establishments (and titans of industry in their own right) like Wal-Mart, Target and Kohls. These companies reap similar revenue from sales, yet their fixed costs remain high due to leases of their stores, warehousing, etc. Amazon has a few select distribution hubs that are massive in size, but are regional and serve large geographic regions. This, in turn, allows Amazon to reach a higher profit level because it doesn’t have to allocate revenue to as many fixed costs, as well as be able to pass some of those savings on to the consumer via lower prices on goods.
Logistics – Amazon, as described above, has few regional distribution warehouses that are located in key areas of the United States. These regional centers allow Amazon to offer services to differentiate themselves from their other online competition, like guaranteed overnight shipping (depending on the time of the order). Amazon has also begun implementing “short-line” logistics with local Amazon delivery vehicles, giving some metropolitan consumers same day delivery of products they order through Amazon.
Selection – Amazon is the ‘Wal-Mart’ of online retailers, with even more of a selection. Amazon can provide this level of service for two reasons. One is its size and distribution network (as described above). The other is its’ effective use of third-party retailers. Amazon allows third-party institutions that are vetted through Amazon’s security process to offer goods through their online page. This gives Amazon a huge advantage in the online world: it allows Amazon to offer things it doesn’t even carry, and make a percentage from the revenue from those sales. These retailers share small portions of their revenue and gain Amazon’s site foot-traffic, which is anywhere between 20-80 million.
Research/Product Development – Amazon Prime is a tool provided by Amazon for $99.99 a year. It’s an annual subscription service that allows subscribers to get things ranging from free shipping on the Amazon website to movie ticket deals at local theaters, as well as access to the Amazon Prime app. This app gives a wide selection of new release movies, as well as Amazon exclusive TV series. Amazon Prime is a bit of a divergence from Amazon’s online retailer model, yet it has key ties to Amazon’s core business and has been wildly successful as a stand-alone product.
Weaknesses
Online Security – Amazon has been the target of numerous “Black Hat” hacker groups over the past few years. These groups have stolen and sold credit card data of roughly 120,000 people on Amazon alone, with the biggest breach being 13,000 in one day. With growing concerns by consumers because of rising identify theft, Amazon has a reactive strategy to these security issues. They’ve chosen to attempt to stop attacks in progress rather than discovering new encryption technology to make their users safer.
Research/Product Development – Amazon has diversified a bit too much in some areas of operation, using key resources to chase profits outside of its core business model. Some of these ventures have proven fruitful, but others have been dismal failures, such as the Kindle. While sales initially were high, Kindle sales have dropped significantly. Pundits have argued, and studies have proven, that consumers still value paper books and have had issues with strained eyes with E-Books. Some of Amazon’s recent business acquisitions have also proven less than fruitful.
Resource Usage – Amazon’s growth has been fueled by its’ reinvestment. Almost all of Amazon’s profits are funneled back into expansion. While this was an amazing strategy to grow, initially, it is no longer. Amazon’s growth has slowed considerable, reaching what some are calling its’ apex. Instead of rewarding investors with dividends, it is choosing to continue to funnel money into lackluster projects and its’ stock price is starting to reflect that stockholder sentiment.
Opportunities
· Continue to push the short-run logistics model in large, metropolitan areas where it is cost effective. This can help fuel more growth as well as brand loyalty by consumers.
· Expand Amazon Prime services in key sectors determined by subscriber analysis. Offering your customer base more services they specifically want might prove fruitful. This addition could also attract non-subscribers to become subscribers because of Amazon Prime’s total value provided to the consumer.
· Expand into markets without major competitors, such as South America and Europe. While Alibaba is Amazon’s far-east look alike, capitalizing on increasing market share in undisputed areas now can prevent future competition if Alibaba decides to expand operations globally.
Threats
Cost-Cutting/Price-Matching Strategies by Competitors: Wal-Mart has substantially lowered prices in key high-margin items that directly compete with Amazon, like electronics. Best-Buy, as well as Target, have implemented price-matching policies with Amazon as well. Previously, companies refused to offer price-matching with online retailers. More companies are expected to start price-matching in 2017 to compete with online retail establishments such as Amazon.
Overseas and Domestic Competitors – While Amazon may hammer on many of its smaller online retailer competitors in the US, they may not overseas. If these companies expanded in markets outside of Amazon’s focus, they could potentially grab footholds in large, unexplored markets. Overseas competitors, like Alibaba, have been growing at similar rates as Amazon. If an online retailer such as Alibaba capitalized on unexplored markets in South America and Europe, they could present a threat to future growth opportunities of Amazon.
Company Analysis
Since the debut of Amazon.com in 1995, the company has grown wildly and seen exponential success. Bezos, Olsavsky and Jassy are all equally important in maintaining the growth of the company. They have led Amazon to innovate the ways that they do business and they do so by always putting their consumers first. For most of Amazon’s life, it has sacrificed its profits so that it could continue to build warehouses in order to ship to customers more easily. However, this past year Amazon has begun to invest their profits in Amazon Web Services and more warehouses in effort to make a larger turnaround profit. So far this year, Amazon has seen a $7 billion dollar increase in their revenue. Overall, Amazon has a strong probability of success for many years to come.