Amazon Internal and External Analysis and Strategic Options

Case Study-Amazon

Internal Analysis

Analyzing Amazon’s internal environment reveals some strategic capabilities and weaknesses. Some of the strategic capabilities are under threat while others are immutable thus giving the company a sustainable competitive advantage. The company’s future depends on how best the Amazon’s management implements measures aimed at fully exploiting the strategic capabilities and at the same time ensuring the weaknesses do not prevent the company from realizing its goals.  An outstanding customer relationships management system is one of the company’s main strategic capabilities. Amazon has an elaborate CRM system that supports the uninterrupted flow of information between the company and its customers (Amit & Zott 2001).  The company has been utilizing information communication technology to improve the CRM. This system enables the company to react to customers’ feedback on time, and this improves service delivery. Amazon also uses the CRM to gather market intelligence that is used as a basis for improving service delivery.

A strong financial position is another strategic capability that helps the company to exploit opportunities in its industry.  Its net profit for the year 2017 was US$3.033 billion with an asset base of US$131.31 billion (MorningStar 2018). The strong financial position has enabled the company to strengthen itself in the online retail sector through expansion. In the past, the company has acquired online companies, and this has supported market penetration. Financial resources enable a business to withstand environmental challenges emanation from a changing environment.   A superb delivery network is another Amazon’s internal strength.  The company has formed strategic alliances with logistics companies that have streamlined its logistics system. As a result, Amazon has managed to exploit the economies of scale, and this has allowed lowering of distribution costs (Madsen & Walker 2015).  In some areas, the company makes free deliveries for products bought in its stores due to the ability to minimize distribution costs.   Analysing Amazon’s internal environment reveals that cost leadership is a strategic capability. Over the year, the company has been a cost leader, and this allows competitive pricing. According to Shankar & Bolton 2004, a company can only offer competitive prices when costs are minimized as no business is willing to make losses. Amazon has been surviving on thin profit margins that allow sales maximization.

The company’s weaknesses include thin profit margin and product flops.  These threats are a treat to the company’s future as they can dilute the impacts of some strategic capabilities. The declining profit margin can dent the company’s strong financial position. In some countries like India, the company has been making losses, and this is raising the question of the sustainability of thin profit margin approach.  The company has in the recent past tried to introduce new products such as fire phone that were a big flop.  The low-cost advantage is under threat due to the increasing competition.   The fact that the company has in the recent past made losses in some markets is a clear indication that Amazon’s cost structure is not strong enough to support competitive pricing.

External Analysis

Amazon is confronted by external forces that present opportunities and threats. PEST analysis is the best model for analysing the external forces facing the company. This analysis focus on the broad dimension factors that are not within the organizational control and are therefore not influences though policies and decisions (Gupta 2013).  The factors under consideration are political, economic, social, and technological.   The political environment provides both opportunities and threats to the company.  Most of the company’s customers are in developed countries, and the political stability experienced in these countries provides an opportunity to grow and avoid losses.  The government’s heightened commitment to fight cyber crimes is a valuable opportunity to Amazon since the company’s operations are susceptible to cyber attacks.  Governments across the world are committed to promoting e-commerce, and this would present both threats and opportunities.  Concerning the opportunity, the company can benefit from the streamlining of online transaction platforms by the governments and this would support the stress-free transaction with its global customers. Regarding the threat, promotion of e-commerce may trigger the establishment of more online retailers, and this would pose a threat to the company‘s market share.

The economic environment forces present opportunities and threats to the company. The fact that the company’s main customer base is in developed countries exposes it to the ramifications of an economic slowdown in these countries. For instance, the 2007-2008 global financial crisis affected major economies in America and Europe, and this had negative impacts on online retailers (Shin2009). On the other hand, the strengthening economies in America and Europe provide an opportunity for Amazon to grow. The increasing purchasing power in developed countries presents an opportunity to the company since it portrays market growth potential.

Social factors have diverse impacts on Amazon’s performance. The changing trends in online shopping present an opportunity to the company. People’s faith in online transactions is increasing, and this is presenting an opportunity to online retailers to grow their sales (Beldad, De Jong, & Steehouder 2010).   Developing countries are also embracing online transactions, and this trend is increasing the market potential in these countries. Amazon has been focusing on developed countries with little or no focus on developing countries.  Developing countries are growing fast leading to an increasing purchasing power thus creating a valuable opportunity for Amazon and other online sellers.

The technological environment is dynamic an online seller who is serious about long term success must closely monitor this environment to ensures strategies reflect the environmental conditions.  The increasing internet connectivity in developing countries provides an opportunity for growing sales in these countries. There has also been an increasing information technology in both developing and developed countries, and this is providing a valuable opportunity for online sellers to enhance their operations (Hawk 2004).  The dynamics in technology increases the risk of technological obsolescence, and this presents both opportunities and threats to Amazon.  Concerning the opportunity, the company sells phones and tablets among other technical devices implying that the demand for the products would increase as customers seek to acquire more modern devices. On the other hand, the risk can lead to the company holding an obsolete stock that would lead to huge losses.

Industrial Analysis

Industrial analysis helps to identify the external environment factors that are close to an organization.  The elements that are considered when analysing an industry include competitors, distributors, suppliers, customers, new entrants, and substitutes. Amazon operates in the online retail sector that has many participants. The sector is made of both big and small retailers that compete for customers. Some of the major Amazon’s competitors include e-bay and Alibaba (Zhu & Kraemer 2005).  The existence of many players increases competition rivalry. The rivalry can lead to price wars where each player seeks to offer the best price. These wars are a threat to profitability and threaten the seller’s ability to recover costs. Amazon has been offering competitive prices with the aim of increasing its market share.

The success of an online retail sector is determined by the firm’s ability to establish reliable distribution networks that ensure the products reach customers on time. Most online retailers form strategic alliances with logistics companies who deliver the products to customers at a fee(Zhu & Kraemer 2005). It is technically impossible for a retailer to establish an in-house distribution network spanning the globe and this necessitates strategic alliances with logistics firms.

The suppliers form an important part of the online retail sector. The bargaining power of the suppliers has far-reaching impacts on the ability of a retailer to offer competitive prices.  Online retailers engage different types of suppliers with varying bargaining powers.  Amazon maintains the minimum stock level, and this makes it necessary to streamline the relationships with the suppliers to ensure timely deliveries. Delays in supplies compromise the ability of an online supplier to meet customer demands. Suppliers of rare commodities can demand high prices that limit pricing decisions.

The online retail sector is made of customers who prefer making orders online instead of relying on the brick and mortar retail outlets. The tastes and preferences of online shoppers keep changing necessitating online retailers to monitor these changes closely.  An issue like online fraud can reduce online shoppers as they would feel unsafe when making online payments. Evidence shows that the number of online shoppers has been on the rise.  The trend is a clear indication of increasing value of the online retail market.

New entrants disturb the status quo in an industry. They introduce new capacities that erode the influence of the existing players.  According to Pehrsson,  2009, the nature of entry barriers determines the significance of new entrants. New entrants form a serious threat to an industry that is characterized by weak or few entry barriers.  Barriers to entry in the online retail sector are not substantial leading to many new entrants. The existing retailers are therefore threatened by the new entrants.

Substitutes form an important element of an industrial structure. The significance of the threat of substitute is influenced by the prices of substitutes and their availability. The substitute for online retail is the brick and mortar retail outlets. In the US Walmart remains Amazon’s main threat as the company’s outlets are distributed across the country. Strategy formulation by online retailers must put into consideration the threat of substitutes to ensure customers do not turn to the substitutes.

Strategy Analysis

Based on the conditions in the company’s internal and external environment, it is apparent the company needs to take some actions to safeguard future success. Analysing the internal environment has revealed strengths and weaknesses that should be put into consideration when formulating the organization’s strategy.  Also, the ideal strategy should reflect the identified opportunities and threats revealed by analysing the external environment.  Strategic options available for the company include diversification, exploiting developing markets, enhancing product development, and rethinking the pricing strategies.

4a Possible Strategic Options

Diversification

Diversification enables a business to reduce the risk associated with concentrating on a specific activity.  It involves engaging in other activities to avoid overreliance on a particular activity.  There are four types of diversification, and they are all relevant to Amazon.  Horizontal diversification is one of the four types, and it involves introducing a new variety of product to the company’s products (Narasimhan & Kim 2002).  For instance, introducing new types of phones and tablets whose characteristics vary from the existing products would amount to horizontal diversification.  Vertical diversification involves a company going up or down the supply chain and start operations that were formerly done by an outsider. For instance, Amazon can choose to start manufacturing clothes to avoid sourcing the same from suppliers.  Concentric diversification is another form of diversification that involves introducing new products aimed at maximizing the utilization of existing resources. The last type of diversification is conglomerate diversification that involves venturing into an area that is not related to the current operations (Narasimhan & Kim 2002). For instance, Amazon can venture into the real estate sector, and this would amount to conglomerate diversification.

Exploiting Developing Markets

In the past Amazon has been focusing on serving developed markets that are characterized with high purchasing power.  The attempt to serve the Asian markets has registered mixed outcomes. For instance, the company’s performance in China was good despite the domination of Alibaba. On the other hand, the company’s activities in India faced serious challenges leading to losses.  There are many developing counties in South America, Asia, and Africa that presents a great opportunity for Amazon. Exploiting these markets would save the company from the risk associated with over reliance on developed markets. Developing countries have been experiencing a high internet penetration that is supporting e-commerce operations. This trend has been influenced by a consistent investment by governments and the private sector in establishing information communication technology infrastructure (Hawk 2004). The purchasing power in these markets has been increasing thus increasing the affordability of Amazon’s products.  The perception of people regarding online transactions is increasing where more people in developing countries are embracing online transactions.

Enhance Product Development

In the recent past, Amazon has faced disappointments when its attempt to introduce new products in the phone category flopped terribly.  This disappointment emanated from introducing a product that is not in line with market expectations.  Product development starts with a careful analysis of the market needs with the aim of ensuring that the new products meet the specific market needs (Lilien, Morrison, Searls, Sonnack,&  Hippel 2002).  Amazon has effective customer relationships management systems that can be used to gather essential information about the desired product features. Gathering the relevant market intelligence would lead to the introduction of the right products that reflect the current market needs.

Rethinking the Pricing Strategies

The company’s pricing strategy should be revised to protect the company from the risks associated with small profit margins.  In the past, the Amazon has suffered losses due to the thin profit margin that makes it difficult to recover costs.  Pricing decisions should be influenced by the cost structure of the company’s business model. Emphasis should be put on continuous cost assessment to ensure the prices set reflect all cost elements to guarantee cost recovery. The company should employ other competitive strategies to supplement price strategies. According to Grenci & Watts 2007, customers seek to realize the highest value for money that is influenced by service quality and prices. Improving the service quality would give customers value for money that would avert price cutting.

4b, Strategy Statement to the Board

Based on the analysis of strategic option, Amazon’s board should consider making some strategic interventions to enable the company to survive the harsh environmental conditions.  The strategies listed below shows the specific competitive advantage that is going to be realized after their implementation.

Diversification– The goal of diversification is to protect the company from over-relying on the online retail.  Concentric and conglomerate diversification would help the company to realize this goal. Concentric diversification should involve establishing brick and mortar stores to expand the company’s footprint in the larger retail sector. Conglomerate diversification should involve venturing into the financial and construction sector to cover the company from uncertainties associated with the retail sector.   Establishing brick and mortar stores will give the company a competitive advantage over Walmart considering that this competitor has been striving to venture into online retail. The conglomerate diversification will enable the company to continue with its low pricing strategies as losses made in retailing can be compensated by profits made in other sectors.

Enhancing Product Development– the goal of this strategic option is to ensure the company’s products are embraced in the market.  The fact that attempts to introduce new versions of phones failed is a clear indication that Amazon’s hardware business segment is under threat.  This intervention should involve companywide commitment where every department is involved in determining the fitness of new product. The marketing department should ascertain whether the product meets market needs. The production department should ensure the new product meets the highest quality standards while the finance department should confirm the commercial viability of the product. This intervention would give the company a competitive edge in the hardware market by ensuring the products offered are in line with market needs.

List of References

Amit, R. & Zott, C., 2001, ‘ Value creation in e‐business.’ Strategic management journal, vol.22, no.7, pp.493-520.

Beldad, A., De Jong, M. & Steehouder, M., 2010, ‘How shall I trust the faceless and the intangible? A literature review on the antecedents of online trust.’ Computers in human behavior, vol.26, no.5, pp.857-869.

Grenci, R.T. & Watts, C.A., 2007,  ‘Maximizing customer value via mass customized e-consumer services.’ Business Horizons, vol.50,no.2, pp.123-132.

Gupta, A., 2013, ‘Environmental and pest analysis: An approach to external business environment.’ Merit Research Journal of Art, Social Science and Humanities, vol.2, no1, pp.13-17.

Hawk, S., 2004, ‘A comparison of B2C e-commerce in developing countries.’ Electronic Commerce Research, vol.4, no.3, pp.181-199.

Lilien, G.L., Morrison, P.D., Searls, K., Sonnack, M. &  Hippel, E.V., 2002, ‘Performance assessment of the lead user idea-generation process for new product development.’ Management science, vol.48,no.8, pp.1042-1059.

Madsen, T.L. & Walker, G., 2015. Modern competitive strategy. McGraw Hill.

MorningStar 2018, Amazon.com Inc  AMZN. Retrieved from http://financials.morningstar.com/income-statement/is.html?t=AMZN&region=usa

Narasimhan, R. & Kim, S.W., 2002, ‘Effect of supply chain integration on the relationship between diversification and performance: evidence from Japanese and Korean firms.’ Journal of operations management, vol.20, no.3, pp.303-323.

Pehrsson, A., 2009, ‘Barriers to entry and market strategy: a literature review and a proposed model.’ European Business Review, vol.21,no.1, pp.64-77.

Shankar, V. & Bolton, R.N., 2004, ‘An empirical analysis of determinants of retailer pricing strategy.’ Marketing Science, vol.23, no.1, pp.28-49.

Shin, H.S., 2009, ‘ Reflections on Northern Rock: The bank run that heralded the global financial crisis.’ Journal of economic perspectives, vol.23, no.1, pp.101-19.

Zhu, K. & Kraemer, K.L., 2005, ‘Post-adoption variations in usage and value of e-business by organizations: cross-country evidence from the retail industry.’ Information systems research, vol. 16, no.1, pp.61-84.

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