“It appears that Bezos recognizes that many of the competitive advantages that Amazon has developed are transient in nature. With a few exceptions (e.g., proprietary software, reputation, the sense of community, and first mover advantages), many of the mechanisms that are at this Web site can be imitated by competitors, albeit not easily. To defend itself against competitors, for the past year Amazon has been developing a detailed purchasing history and profile of its customers. It now has a vast and unique database of customers’ preferences and buying patterns, tied to their e-mail and postal address (Economist, 1997a). Notes Alberto Vitale, chairman of Random House, Inc. (Wall Street Journal, 1996): ‘Amazon is creating a database that doesn’t exist anywhere else. Book publishers have never had much market data about readers, and some are already salivating for a peek into Amazon’s files’” (Kotha, p. 16).
“Amazon.com is considered to have one of the best senior management teams in the industry. Heavy reliance on stock options in employee compensation packages (and a [once] high-flying stock attracting lots of press attention) has enabled Amazon.com to fill its ranks with very motivated and bright people looking to ‘make a difference’ in the world of e-commerce” (Balanced Scorecard, p.1). “Meanwhile, Amazon’s board is facing mounting criticism for apparently never having questioned Bezos on strategy, judgement, or financial matters. The board is too small, too clubby, and lacks the necessary independence to make serious judgement or interventions in Amazon’s affairs. The board is too heavy with venture capitalists [that] are looking to cash out rather than build long-term shareholder value. [Critics also] decry the lack of retail experience on the board. All of this is complicated by the large ownership stake of Bezos, who holds some 32% of the Company’s stock. That stake is a serious obstacle to anyone looking to shake up the board. The board certainly has a lot of brainpower. But it remains a tiny body to run a Company with thousands of employees and a $4 billion market capitalization” (Eads, p.1).
Another concerning trend is customer churn increasing while repeat business declines. However, “sequential revenue growth has slowed meaningfully for most e-tailers in recent quarters” (D’Eathe, p.3), possibly indicating that the increased customer churn and declining repeat business are more a symptom of the general decline in the U.S. economy, as opposed to an internal weakness of Amazon. “If Amazon can capitalize half as well on the myriad of large retailing opportunities before it as it has to date, it can own the space. However, the Company must execute flawlessly on its march toward profitability and overcome early signs of a possible slowing in the U.S. online commerce activity” (Reamer, p.1).
It would be the desired outcome for Amazon to use its competitive strengths (powerful brand name, management experience and distribution and technology infrastructure) to achieve its objectives. Amazon current stated objectives are: 1) To put customer satisfaction first by using the Internet to transform book buying into the fastest, easiest, and most enjoyable shopping experience possible; and 2) To sell anything that can be sold on the Web. These objectives are reasonable. However, objectives should be specific and measurable. Some alternative objectives would be to focus the Company’s resources toward achieving profitability by the fourth quarter of 2000 (an annual objective), and to increase profitability by 5 percent per year for the next 3 years (long-term objective). These objectives would give meaningful, measurable goals that management would need to obtain, or it would require management to re-evaluate the Company’s objectives or the Company’s strategy to achieve the objectives.
With the aforementioned objectives in mind, the Company needs to implement a strategy to achieve the desired results. It is necessary to evaluate alternative strategies before selecting the actual strategy to implement. The SWOT or TOWS, SPACE, Grand Strategy, IE, and QSPM Matrices are tools to help in the evaluation and selection of alternative strategies. The matrices indicate that Amazon is in a strong competitive position, and that the Company should build and grow. The matrices indicate that, despite Amazon’s financial position, the Company has some distinct competitive advantages in a high-growth or unstable industry. Some strategies for companies that fit this profile are backward, forward and horizontal integration, market penetration, market development, product development and joint venture.
One strategy that would fit into the aforementioned categories would be international expansion. Expanding internationally is a market penetration strategy in which a company introduces its present products or services into new geographic areas. “As it stands, Amazon.com is well-positioned to remain the world leader in both the development of e-commerce strategy and its implementation” (Balanced Scorecard, p.6). There are several advantages to selecting this strategy. For instance, “Amazon has invested heavily in product development in the United States, building a state-of-the-art Web site that is generally considered the best in e-commerce. This technology is highly scalable and has been used for each new market the Company has entered. Furthermore, much of the personalization technology and U.S. content has already been created, and can be shared across markets. By leveraging this existing technology and infrastructure, Amazon has been able to keep product development costs low.
Amazon also benefits from certain centralized costs that can be leveraged across multiple markets. [For instance], the Company does not have to hire a new team of engineers for every new market it enters, as it already has a base working out of Seattle. Clearly, these streamlining efforts give Amazon a significant advantage over single country e-tailers” (Becker, p. 5). For all of its strengths, the strategy of international expansion does have some weaknesses. For instance, “In the United States, Amazon built its brand essentially free through public relations and word-of-mouth advertising. Clearly, the Company benefits from its global brand – having shipped products to over 200 countries in the past five years. However, in Europe [for instance], e-commerce has not taken off as much, and Amazon will never be able to replicate the hype and excitement that it received in the United States during the ‘Internet bubble.’ Furthermore, Amazon must spend aggressively in each of its countries because media audiences are less likely to cross borders” (Becker, p.9). Amazon is not in the financial position to spend aggressively to achieve additional revenues, and, even if it were, the additional revenues alone would not help Amazon to reach its objective to achieve profitability. For this reason, an alternative strategy was selected for implementation.
The strategy that was selected was a hybrid strategy of product development and joint venture. As was previously mentioned in the EFE Matrix evaluation, a tremendous opportunity for platform monetization exists for Amazon. The Company could sell “access to either its customer base, brand, inventory management, or customer service and order fulfillment infrastructure (or all of them simultaneously), then the economics of the Amazon.com business model could be a lot better than 2-3% margin. Operating margin could then start to creep toward double digits over time, which would indeed support a premium valuation relative to other retailers” (Reamer, p.6).
Amazon has recently entered into two such deals. One deal was with Toys “R” Us and the other was with Borders Group. “Under the terms of the strategic partnership between [Amazon] and [Borders], [Amazon] will assume fulfillment and inventory for the co-branded Borders.com Web site. Amazon.com will be the seller of record, providing inventory, fulfillment, site content, and customer service for the co-branded site. The new site will continue to offer content unique to Borders.com, including store location information and in-store event calendars” (Legg, p.3).
“With the announcement of its e-commerce partnership with ToysRus.com last year, Amazon launched into an innovative e-business services model that represents a win-win scenario for both Amazon and its retailer customers. As in the case with ToysRus.com, the Company has leveraged its core assets to provide three critical components of a successful e-commerce strategy to retailers, including: (1) a scalable and proven e-commerce technology platform, (2) marketing capabilities in terms of access to 30 million e-commerce buyers at Amazon, and (3) outstanding back-end products fulfillment capabilities (that represent one of the Company’s core differentiators versus competitive e-commerce distribution capabilities).
In turn, retailers typically enjoy similar core competencies in their land-based retailing business, namely merchandising, pricing control and inventory risk. As with the ToysRus.com relationship, both companies leverage the strengths of their respective business models to share in the costs of conducting e-commerce. In this regard, ToysRus.com has the potential to lower its timing to breakeven earnings in its e-commerce business, while Amazon has the potential to scale the number of e-commerce orders through its fixed-cost distribution network, thereby increasing the likelihood of breakeven earnings [by the fourth quarter of 2001]” (Patel, p.7).
In addition to the aforementioned justifications for selecting this strategy, is the fact that the QSPM Model favored this strategy over the international expansion strategy. The platform monetization strategy yielded an attractiveness score of 6.30, as compared to a score of 5.15 for international expansion, primarily due to reasons already mentioned. The only drawback to this strategy was a “report that the key finding signaling a challenge to Amazon’s growth is that consumers view the online retailer as an outlet for media products-books, CDs, and videos-rather than as a store carrying an array of items such as kitchenware, garden furniture and hardware tools” (Junnarkar, p. 1).
However, the advantages appear to far outweigh the disadvantages. If Amazon is able to formalize several more deals with other traditional retailers, then the Company’s financial performance should drastically improve. Finally, implementation of this strategy will be relatively easy, as the Company has already began to implement the strategy on a small scale. There should be few management conflicts to work through, as there should be no political maneuverings to obtain additional resources to grow one department over another. If properly implemented, this strategy should help Amazon to achieve its objectives to focus the Company’s resources toward achieving profitability by the fourth quarter of 2000, and to increase profitability by 5 percent per year for the next 3 years.
Bibliography
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