Title: How Amazon altered its strategic direction to enable growth and expansion
In 1994 after the Internet´s major growth, Jeff Bezos, the CEO of Amazon, wanted to build a “everything store” online. To position his service in people’s mind, he had to focus on a niche. He made a list of several possible categories and one interesting option popped out – the books. It was a $10 billion industry in the United States in 1994 and customers generally had “Fear of Unknown”, and since books were pure commodities and were identical whether you bought them online or in a store, this fear would be non-existent. As Bezos begun to sell the books over his platform, he delivered to all 50 states in the U.S. and over 45 countries, which brought him a weekly income of 20,000 US-Dollar. Whereas, today amazon is one of the biggest companies of the world, with 566.000 employees and an operating income of $4.1 billion.
As books started selling, Amazon wanted to establish the difference in a consumer’s mind and build sustainable competitive advantage – providing greater customer value and low prices. After several customized activities, this became unique and a stepping stone for sustainable competitive advantages for Amazon.
Since online shopping was new to many and customers had a fear of “unknown quality”, Amazon were one of the first ones to introduce a “30-day return policy”, as well as they put users reviews into use, which was a part of reducing customers fear of failure. Later, in 1996, Bezos introduced customer personalization suggestions based on their taste. Now Amazon uses algorithms that understands the user´s needs, desires, wants and customizes the shopping experience for every individual. A survey notated that more than one-fourth of amazon’s sales came from Amazon’s personal recommendations.
Amazon has designed its activities in a way that they complement each other and reinforce one another and thus building the competitive advantage. Fit among activities reduces cost and increases differentiation. In 1998, Jeff became aware of Amazons potential to expand further and decided that Music and DVDs was his next target. Amazon could use the same value network profitably to meet needs of the customers in those new categories. The expansion went well, and later started to sell Toys and Electronics as well. Amazon slowly moved towards “The Real Everything Store”.
During the first half of the 2000s, Amazon´s size grew rapidly, and the warehousing and distribution structure became more complex. Bezos then faced the question if Amazon should be in the business of storing and distributing its products directly from the manufacturers and distributors. After a series of analysis, Bezos realized that quality of service is largely dependent on efficient distribution, and this was hard to control when you outsource. Because of this, Amazon needed to create on its own and it would be a major competitive advantage.
Amazon executives made it possible for small retailers and individuals to sell their products to Amazon´s customers. If a seller gains the order, Amazon would get the commission from the sales. As an “Professional” you pay $39.99 per month for the service, plus you have fees for each sold item, which depends on what you sell. Whereas as “Individual”, you do not have to pay a monthly fee, but instead you pay $0.99 per sold item, plus referral fees and variable closing fees.
It was clear to Bezos that one of the biggest hurdles for online shopping was the shipping cost, because customers never paid for these charges while shopping from an offline retail store. In the early 2000s, Amazon announced free shipping for orders of a hundred dollars, which was a great success, and then later brought down the free shipping to items costing more than $25. Amazon Prime was a service that included unlimited free express shipping at the price of $79 for a year. This led to the sales exploding and Amazon´s prime members came back to shop more through Amazon. Amazon made almost double the money from a prime member than the non-member. Now, in addition to express shipping, Amazon Prime provides services such as Prime Movies and Prime Music for members.
When it comes to competitors, Amazon possesses substantial resources to fight back if a competitor enters their market. Amazon will slash prices or make some other aggressive plan as it is committed to retaining the market share. When Apple began to disrupt Amazon´s music business, Bezos was taken back, and there was little he could do. He didn’t want to repeat the same mistake again and wanted Amazon from now on to disrupt their own market. Instead of competitors threatening the market, they faced the threats themselves. He chose “Books” as their first category, and the “Kindle” was born. Amazon’s team is constantly working on ways to kill their own businesses and it appears that they are in a better position to disrupt their own markets.
PESTEL Analysis of Amazon
Some of the essential political factors are that taxes and other political issues are a costly affair. Political disruption can disrupt the supply chain and result in reduced sales. Amazon is facing trade protectionism in the USA from the Trump administration that threatens the existence of foreign firms in the country, although Amazon is an American firm, considerable amount of its goods come from overseas, due to this their operations may be threatened by a possible reduction in the number of imports or tariffs to foreign imports. There are also potential trade deals between the British and American government because of Brexit. Agreements that could serve to ease Amazon´s operations in the UK as an American firm, potentially reducing import taxes and resulting in less regulations.
The economic factors have an important influence on the market and market condition. A good economic condition in a market leads to better sales and higher profits. Even in the times of recessions, the retail industry was doing well. Because of this, it’s safe to say that people will always buy regular items despite the economy. In 2015 E-retail grew with 23%, and more growth is expected. All this indicates that Amazon could see much more growth and increase in profits. Amazon has also received some criticism about reducing jobs traditionally done by human resources, reports show that the firm is actually creating more jobs that its cutting, creating additional jobs in the US and UK at new Amazon facilities. (Vandevelde, 2017)
Social and cultural trends are both important factors behind the growth of e-retail. There has been an increase of mobile technology and growth in digital technology which has been a part of boosting e-retail. Today “everyone” owns a smartphone with access to internet, social media and online shopping, due to the availability of 4G and digital technology sales of retailers like Amazon has increased. In addition to this, millennials like to do most of their shopping online. They get the best products, at the best price delivered to their doorstep, and this is only offered by e-retailers. To market itself
The concept of dynamic capabilities expands on the concepts of capabilities and resources. David Teece defined this concept as “an organization’s ability to renew and recreate its resources and capabilities to meet the needs of changing environments” (Johnson, Whittington and Regner 2017) and suggested that there were three types of dynamic capabilities: sensing, seizing and reconfiguring.
In Amazon’s case, they have several resources and capabilities that could be utilized in this manner, e.g. scale advantages, innovation processes and a vast distribution network
A good example of Amazon’s dynamic capabilities is when Amazon in 2017 decided to acquire Whole Foods, a grocery chain in the US. In terms of Teece’s dynamic capabilities Amazon sensed an opportunity arising in the grocery segment, which they previously had little experience in, and seized it by buying Whole Foods. Through this acquisition Amazon has gained entry to a potentially very lucrative market. The reconfiguring part is how Amazon now plans on integrating and improving upon Whole Foods’ concept.
Amazon’s major advantage here is their experience from their efficient large-scale delivery system and known brands i.e. Amazon Prime. Amazon has been a pioneer in building a loyalty program that actually promotes loyalty. Prime customers spend nearly 5 times more annually compared to non-Prime members (Business Insider). No other competitor has been able to build a loyalty program as unique and successful as Prime.
When we continue to look at Amazon’s reconfiguring of their capabilities they have introduced Prime into Whole Foods, Prime customers can get discounts and other benefits in the stores. In addition Amazon get an enormous opportunity to collect data on their customers, which in turn can be used by Amazon to further develop their services, for instance Prime.
An interesting example of Amazon’s innovation is the Amazon Go concept. Which is a brick and mortar store in combination with the “amazon go” app. It connects the traditional grocery store with the app, making the old-fashioned point of sales obsolete. Instead, you only walk into the store with your mobile phone in your hand, activate the app and scan the barcode which appears on your smartphone. Then all you need to do is picking up the items that want and you just leave the store when you are done shopping. No queues, no waiting, no hassle. The costs for the goods is debited immediately from your currency account after you left the store.
The continued development and reconfiguring of the Prime concept would perhaps become one of Amazon’s greatest advantage when they compete with others. Amazon gathers intimate knowledge of each customers preferences, shopping habits, prefered products and so on, if they can capitalize on this data even further and reconfigure these major resources, which are data and Prime, they can continue to develop innovative products and service offerings to their customers and further sense and seize opportunities that arise.
How Amazon manage their employees
“You can work long, hard or smart, but at Amazon.com you can’t choose two out of three.” (Jeffrey Bezos, 2007). Amazon is a company known for innovation and their management of white-collar employee may be an innovation in itself. “Its not easy to work here”, Bezos said in his 1997 letter to shareholders, and this is a reflection of the principles Amazon still use today to manage their employees, or “Amazonians”.
In interviews, former employees explained how they thrived at Amazon precisely because it pushed them past what they thought were their limits. (NYTimes, 2015) So is pushing the employees to the edge one of the main reasons behind Amazons success?
At Amazon, the workers are told to forget the “poor habits” they learned at previous jobs, they are encouraged to tear apart on another’s ideas in meetings and when they eventually “hit the wall”, there is only one solution: “Climb the wall.” This has fostered Amazon the reputation of having high employee burnout. Bob Olson, a former Amazon Books Marketing employee said in a 2015 interview with the New York Times, “nearly every person I worked with, I saw cry at their desk.” Could this cutthroat environment created by Amazon really be the way to go if you want to extract the full potential of your employees?
Workers at Amazon are expected to adhere to Amazon’s key principles for leadership. The principles are a foundation of how Amazon wants their employees to integrate with Amazon’s way of thinking. Think big, deliver results, dive deep and invent are some of their key principles. So how do they get their employees to deliver to these expectations?
One key point is the salary at Amazon. “The pay is above average, probably 1.5 times elsewhere,” said a current finance manager of the company. With high pay comes higher expectations, and with respect to benefit, a current senior business development manager said that “health insurance, time off, and 401k are all equal to or better that what I have seen in similarly sized companies.” Amazon also were praised recently for raising the minimum wage of all U.S. employees to 15 USD an hour, more than double the federal minimum wage at 7.25 USD. (CNN,2018)