Amazon Business Model Essay

Overview: Amazon.com was founded in 1994, it started by selling books online. As it grew, the company started offering various products and services. Some goods include: DVDs, videos, electronics, camera and photography, clothing apparels, shoes, and so forth. Other retailers have merged with Amazon.com to offer diverse quality of items based on different degrees of usage, such as new, refurbished, and used items. The company’s headquarter is in Seattle, Washington. It has six global websites that serves customers that are based in the United States, the United Kingdom, Germany, France, Canada, and Japan. Their website features: e-mail order verification, customer review on products, and one-click shopping. Vision: According to Jeff Bezos, the founder of Amazon.com, they want to build one of the most customer-centric company in the world. A place where people can find everything they want to buy online (Amazon.com: the Hidden Empire, 2011). Mission: â€Å"Work Hard, Have Fun, and Make History.† The company’s core value is based upon customer obsession. With the help of innovation and technology, they want to take lead in customer care (Fast Moving Consumer Goods, 2009). Business Model A business model is a conceptual framework which expresses the underlying economic logic and system. It proves how a business can appropriate costs, make money, and deliver value to customers. As a result, this segment will introduce this company’s model, and how over the course of several years, it has managed to adapt their model to keep itself ahead (Business Model Definition, N.D). Business Strategy: Business Foundation: The foundation of Amazon.com was built on the ability to transform. It has proved that when opportunities arise to serve new or existing customers, it manages to adapt new business models to exploit it. The company is able to launch and run new businesses while extracting value on existing ones. Accordingly, they will satisfy their customer’s need no matter what, even if it is foreign to their current model. â€Å"You cannot stop at what you are good at.† Jeff Bezos says, â€Å"You have to ask what your customers need and want, and then, no matter how hard it is, you better get good at those things.† (Jeff Bezos Biography, 2001). The leader of Amazon was always interested in building an online retailer. The business model was not uniquely customized to the peculiarity of the Internet, nor was it predominantly innovative as it was based upon an online catalog operation. He saw himself improving on the traditional brick-and-mortar stores saying, â€Å"Look at e-retailing. The key trade that we make is that we trade real estate for technology. Real estate is the key cost of physical retailers. That’s why there’s the old saw: location, location, location. Real estate gets more expensive every year, and technology gets cheaper every year. And it gets cheaper fast.† (Online Extra: Q&A, 2001). However, it was an inexperienced observation when the company assumed that it could expand without making physical investments. Currently, Amazon has invested a large amount of funds into warehouses. Third Party Sellers: After gaining a large amount of profit from their book industry, they began to expand into easily shippable consumer goods. This lead them into two new directions; the first initiative was to host small business as part of the Z-Shop project. The second was partnering with several e-retailers that sold goods that Amazon.com did not. These projects allowed merchants to list up to 3,000 items at cost of 9.99 USD a month (Amazon.com Opens zShops, 1999). Even though this creates competition between Amazon.com and the third party sellers, it gains a percentage of each sale as commission from these merchants. The company obtains information on consumer’s purchasing habits, and create one destination where purchasers enjoy a consistent experience (Chaffey, D., 2012). Competitive Environment As stated previously, Amazon.com is an e-market, and in order to analyze the competitive environment both SWOT (Strengths, Weaknesses, Opportunities, and Threats) and Porter’s Five Forces will be discussed. SWOT Analysis Strengths: As of January 2010, Amazon.com has three times the Internet sales revenue of the runner up, Staples. By offering a large amount of varied categories through its website and other international ones (Amazon.co.uk, Amazon.co.fr, and so on), it has managed to grow to a customer based company with over 30 million people. In addition, the online retail format enables the company to reduce costs of managing inventory (Amazon.com; online bookstore, 2008). Due to Amazon.com building their business model around their customer’s ever-changing tastes and preferences, they were able to avoid the dot-com bust – a period between 2000-2002, where many dot-com companies went bankrupt (Dot-com bust, 2012). Amazon.com has successfully managed to make its customers to feel that anything they could possibly want could be found on their website. Additionally, its products are marketed at a competitive price. Another important factor is their speedy delivery with their usage of UPS and FedEx (United States) and Royal Mail (United Kingdom). The company also caters for people that prefer online shopping with extra services such as Amazon Prime – a service with a yearly payment, customers are eligible for free next day delivery. Even though Amazon.com is known to be an online seller of most things, it still excels in its original market of book selling. Evidence of such is that students are more likely to use the marketplace to purchase or sell used university books at a fair value. Weaknesses: From a financial standpoint, Amazon.com’s goal of being a customer-centric company that wants to gain a market share rather than profit may not be appealing to investors. Also by relying on third party sellers to provide products to customers, there is the risk that the seller may fail to commit to their sale. Customers will most likely blame Amazon; therefore, damaging Amazon.com’s reputation more than the third party. Another disadvantage is that prices may differ due to geographical location and economy, for example a FILCO Keyboard is 100USD in the in the States; whereas, in the United Kingdom, it is 100GBP. (Amazon.com; online bookstore, 2008). Opportunities: There is an opportunity to expand to other emerging countries such as China, India, and the Middle East. Not only does Amazon have opportunities to expand its base to other geographical locations around the world, it also has the chance to provide many local shops to sell its products abroad through their website. There will be an incentive for retailers to post products on Amazon’s website to increase their sales around the globe, as a result, the company will generate more revenue through third party sales. In addition, it is also possible to open retail stores or provide its own goods such as the Kindle Fire to well-known and established retailers. These suppliers could then be paid a small commission fee to have them display their goods in a proper showcase. This will allow customers to physically interact with the company’s gadgets similar to an Apple store. They could also provide tech support to any problems that may arise. Threats: Currently Amazon.com faces the threat of 15 court cases in regards to patent infringement. Moreover, international issues with their foreign websites may occur, such as export and import restrictions, taxes, tariffs, trade barriers, different payment cycles, and political instability. To illustrate, American electronics use different voltages compared to Europeans, which may cause issues to buyers that are unaware; therefore, Amazon must take extra precaution to ensure that customers are fully aware of what they are purchasing. It may also struggle to provide proper customer support to people that have purchased goods abroad. Porter’s Five Forces Threat of New Entrants: It is unlikely that competitors will be able to compete with Amazon.com’s information system. The technology that has been used in their website is unique, such as the One-click shopping. It has been patented to deter their competitors from copying it. Competitors will find it difficult to compete with Amazon’s brand recognition, because they are well-known for selling books online and are fairly established in that market (Analysing Amazon.com, 2006). Bargaining Power of Buyer: Due to a wide variety of choice, the bargaining power is high as customers may choose to buy from other sites rather than Amazon. Although, Amazon.com has been known to price their products lower to compete with other services such as iTunes. Threat of Product Substitute: It may be considered high, because people might prefer to physically visit a store rather than buy it online. Bargaining Power of Supplier: Amazon.com is not allowed to directly purchase electronic products directly from main distributers such as Sony, because of its low cost strategy. On the other hand, in their book sector, the company has opened five automated distribution centers located within the United States. This lessens dependence on their main distributer, Ingram (Analysing Amazon.com, 2006). Industry Rivalry: Amazon.com has little competition versus websites that sell everything; however, they will have to compete with websites with certain niche for products. For example, competing with Newegg.com with computer parts, iTunes with music, Netflix with movies, Barnes and Nobles for books, and Best-Buy for electronics. Potential Growth through Agility and Adaptation To be regarded as an agile company it must have four characteristics; it must be flexible, adaptable, coordinated, and balanced. The business must have the capability to adjust and adapt in effective ways to environment and market changes. There are three types of agility, one that involves the customers, another with partners, and finally with operations (Marakas, 2011). Consumer Focused Strategy: As previously mentioned, Amazon.com is obsessed with its customer base, the company’s aim is at gaining market share rather than profit. Accordingly, pricing is said to be the primary tool while considering customer’s bargaining power; therefore, adjusting the price of identical goods to correspond to the purchaser’s willingness to pay is a necessity. Amazon.com does not operate in any physical stores; all of its sales occur through its website. The company captures their customers recommendations and comments for site visitors to read, and this is similar to that of a salesperson in a store offering advice on which product to buy. Their website is consistently improved to be personalized and satisfying for customers. It tracks users traffic, the number and duration of visits, what products have been looked at, and so on. Amazon.com then uses all this information to create patterns. It then uses this data promotions and evaluation of goods. Unique and personalized features such as online customer reviews, personalized recommendations, and One-Click ordering, customers truly feel as if their needs are being catered to. Amazon’s website is so technologically advanced, that each customer’s front page would be different from another (Hill, M., N.D). Furthermore, Amazon.com offer its users almost everything due to the vast amount of resources available, such as Amazon.com Auctions, Marketplace (selling of used items), and Z-Shops (third-party sellers). Growth Strategy: In late 2007, Amazon created a subsidiary company called Lab126. Their first product was the Amazon Kindle E-Book Reader. Its business model was so foreign, that it had disrupted the entire industry. In order to be able to launch this product, Amazon became an original equipment manufacturer (OEM). It has linked the Kindle into a digital media platform that used both transaction and subscription based content delivery. Content producers have also partnered up with Amazon to create new content for the Kindle. Even after changing their business model several times, their ability to improve operational efficiencies such as shopping convenience, discount pricing, ease of purchasing, reliability of order fulfillment, and to purchase a large quantity of products from suppliers allowing them to benefit from discounts and offer a wide selection of goods to their customers is the key to sustainable competitive advantage (Kotelnikov, V., N.D). Innovation Strategy: Amazon has redesigned Android 3.0, as a result, The Kindle Fire has a clean, user-friendly home screen without random widgets scattered within the interface. The company has spent several years building up their services such as their cloud music player, video service, Kindle e-books, Android App Store; therefore, the tablet has a vast amount of content. As a result, consumers will know exactly what to look for in the device, and they will know where to get its content. The price point of 199 USD – compared to 269USD for the Xoom, 379USD for the Galaxy Tab, and 499USD for the iPad (A Tablet Buyers Guide, 2012) – is a price consumers are willing to purchase and weigh off the opportunity cost. It will not affect a large portion of their disposable income; therefore, they are more likely to purchase it for their kids. It is much more appealing to purchase an item that is practical at a price of 199USD in comparison to other practical goods at >350USD price range. The objective of the Kindle Fire is mainly about media consumption. Amazon has supplied this device at a low price point, in return, customers are being hooked into Amazon’s digital distribution ecosystem. The main purpose of this is to buyers to purchase high margin items such as the Kindle Apps and E-Books. The Kindle Fire will become a platform for selling digital content, and its distributer will most likely subsidize some hardware to be able to sell more content in the long run. This is a similar approach to what they have done with the E-Reader Kindles. Adaptation Amazon.com has managed to adapt its markets to current events by creating promotional sales that are equivalent to specific dates of the year; for example, Black Friday, Christmas, and Veteran’s Day. They have daily, weekly, and monthly deals constantly running throughout the year. The company’s website places recent products that are popular on their front page, in order to have people notice it. Furthermore, Amazon.com combats competition by allowing sellers to open their stores for a small fee of 9.99 USD a month, and taking a small percent free from supplier’s sales. Conclusion The essay first introduced Amazon’s business model. This model involved business strategy, foundation, and third party sellers. 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