Aspiring Polymath - Zack Parnell: Amazon.com - External and Internal Competitive Analysis

Amazon.com - External and Internal Competitive Analysis

Team-Written for Thunderbird School of Global Management

Amazon.com, Inc. is the world's largest online retailing company headquartered in Seattle, WA. Founded in 1994, Amazon started as an online bookstore and quickly became popular as it received high marks on several internet rankings. A few years later, in line with founder and CEO Jeff Bezos' goal of having the "earth's biggest selection[i]", Amazon diversified their company to include a myriad of products ranging from DVDs to software to clothing to furniture. By focusing on the customer satisfaction and having the "earth's biggest selection", Amazon has been able to grow from a garage operation to the company it is today generating $34.2 billion in sales in 2010.[ii]

Rivals - Amazon.com has grown tremendously since its start in Jeff Bezo's garage in 1994. Amazon's primary competitors are the online retailers that also provide a wide range of products. These competitors can include companies that are purely internet-based (overstock.com) or companies which have physical and online stores. (Wal-Mart, Costco).

Threat of Substitutes

As much as e-commerce has grown, there will always be a threat of substitutes from the physical world. The traditional brick and mortar stores provide a customer experience that is virtually impossible to replicate in the online digital world. For example, when buying clothes in stores customers elect to try on the item before making the purchasing decision. This activity is not available to any of the online clothing retailers. Additionally, online retailers are often unable to provide the real-time customer service of the brick and mortar store employees.

The threat of substitutes not only comes from the physical world but also the digital world. As Amazon strives to provide a wide variety of products, it cannot compete with specialty online stores. These specialty stores can customize their website to better display and assist the consumer in their purchasing decision, where as Amazon may not be able to in order to preserve the “look and feel” of their website. Auction websites like ebay.com or local listing websites such as craigslist also offer the consumer alternate ways of purchasing a similar or same product.

New Entrants

Currently, there are high barriers to entry for Amazon’s two largest businesses, online retailing and e-readers. In the online retailing space, Amazon is the 800-pound gorilla, with sales revenues three times larger than Staples, the next largest online retailer. As such, Amazon has tremendous brand awareness and compliments its online storefront with an extensive network of over 50 distribution centers worldwide. However, companies such as Shoprunner.com provide an example of the types of threats Amazon can expect to see in the future. Shoprunner.com is the online storefront for a collection of established brick-and-mortar retailers that seek to access online customers without making the types of concessions required of Amazon partner stores.

Books, or eBooks sold through Amazon’s proprietary Kindle technology, are currently a huge source of growth for Amazon with few viable competitors. Last June sales of Kindle eBooks exceeded sales of paperback and hardback books on Amazon for the first time in history. Companies such as Apple, HP, and Samsung have a history of technology innovation that virtually guarantees competitive platforms for eBooks will emerge and evolve causing additional competition for Amazon.

Suppliers

Amazon’s original core business was selling books and music. Now the company operates retail sites for companies like Target, bebe, Timex, and LaCoste. With increased volume and profitability in online retailing, Amazon has demonstrated its model can help partners leverage the power of Amazon’s brand and infrastructure. Being the world’s largest online retailer gives Amazon tremendous leverage with its suppliers. In many ways, Amazon is to online retailing what Wal-Mart is to brick-and-mortar retailing. Suppliers chose Amazon because they believe Amazon will provide a conduit to more online customers than anybody else. Ultimately, Amazon’s ability to grow and maintain profitable partnerships relies on its continued ability to add customers.

Publishers are currently eager to be part of Amazon’s fast growing e-reader segment. As Amazon’s Kindle technology is one of the few established technology platforms and channels for eBooks, Amazon’s position should be strong for the next few years. However, as stated in the “New Entrants” section, Amazon is vulnerable to competitive products and technologies from companies like Apple, HP, and Samsung. Suppliers will gravitate toward the delivery technologies that customers prefer and, for now, customers prefer the Kindle experience.

Buyers

Historically, online shoppers have been fickle. With few current incentives to remain loyal, online shoppers gravitate to low-price vendors, free shipping, and easy-to-navigate websites. To date Amazon has clearly met the aforementioned criteria. To stay in the good graces of online consumers, Amazon must ruthlessly control its prices and solidify its brand. Perhaps due to its return policies, buyers have also demonstrated a willingness to trust Amazon, which naturally works in its favor.

The future behavoir of eBooks customers is more difficult to predict. Currently, they are smitten with the Kindle’s simple display and Amazon’s electronic format for “the printed word”. On the other hand, new technologies are constantly arriving and today’s Kindle could be tomorrow’s Palm Pilot.

The VRIO Analysis has been applied to the following areas: Research and Development, Organizational Culture, Customer Relations, Incumbent Advantages and Branding.

Research and Development:

The Research and Development area has proven extremely valuable for Amazon. This area has led the company to implement customer experience features such as “Listmania” and the “Wish list”. This features not only help customers find the desired product information, but also allow customers to determine which products they find most valuable. Additionally, the Research and Development area has led to such product breakthroughs as the Kindle, which has caused a revolution in the publishing industry and given the company a significant competitive advantage. Although the R&D department has created tangible benefits for Amazon, these advantages are not rare, as several other companies such as Barnes and Noble and Sony offer e-readers with similar technology and companies such as Google and Netflix, offer customer features which are similar to “Listmania” and “Wishlist” which make customer recommendations based on previous searches and/or purchases.

Our group finds these technological innovations are costly to imitate because of the high level of R&D spending required to build a product such as the Kindle, as well as the technological expertise required to refine and improve search algorithms. As it pertains to organizational fit, the features and products created by the R&D area fit perfectly with the organization as a whole, as these benefits are aimed at improving the customer experience and enhancing the ease with which customers can shop in the Amazon site.

Organizational Culture:

In reviewing the list of company values on the Amazon site[iii], values such as bias for action, frugality and leadership are stressed. Our group considers the company culture to be a valuable part of Amazon’s competitive advantage since these values highlight the company’s ability to quickly implement changes and utilize resources efficiently. Although important, our group does not consider these values to be rare as several companies have values which stress leadership, action and the efficient use of resources. We also do not find this competitive advantage to be costly to imitate, as these values are listed in the company’s website and are thus public knowledge.

Since the values for the organization seek to improve the customers experience by empowering employees to act fast, exhibit leadership skills and utilize resources efficiently, our group sees a direct connection between these values and Amazon’s position as an industry leader.

Customer Relations/Reputation:

Harnessing and maintaining this competitive advantage is critical to Amazon, since the company both relies on its customers to post customer reviews online and to purchase products on its website. Our group does not find this to be rare competitive advantage, as several companies focus on improving customer relations for its customers. This competitive advantage is not costly to imitate as companies simply need to have a clear sense of what customer expectations are, and meet those expectation on a consistent basis. Our group does see a strong organizational fit between customer relations and the company’s reputation as Amazon’s stated goal is to be “Earth’s Most Customer-Centric Company” and this goal can only be achieved by having strong customer relations with customers.

Incumbent Advantages

Amazon launched its online store near the birth of the consumer internet as we know it today in 1995. There were a mere 15 million internet users in 1995, today there are over 2 billion (a 12,500% increase in user adoption[iv]). Amazon.com gained first entry advantages and holds tremendous value by opening its online bookstore, subsequently selling music, toys, and more, and then opening up to private sellers on the site. Only one company can be the “first entry” in an industry – a very rare title. This incumbent advantage cannot be imitated by a retailer; however, a firm like Google, for instance, is also leveraging an incumbent advantage in web search to span into Google Shopping. Incumbency played a major role in Amazon’s growth strategies – far before most competitors even entered the space – Amazon acquired start-ups like IMDB (movie reviews), Alexa Internet (web traffic data), and Zappos (shoe and apparel retailer). By becoming the biggest and best early on, Amazon diversified and gained a tremendous upper-hand over potential competitors with grand economies of scale and an incredibly well organized conglomerate where all activities fit the corporate vision of internet retail and services – large data centers, diversified portfolio of subsidiaries and partners, and internal R&D project like Amazon Web Services (cloud storage). As an incumbent of this magnitude, the ability for competitors to imitate Amazon is incredibly slim.

Branding

One of the greatest decisions Amazon made was changing its brand name from Cadabra before it became mainstream. Named after one of the greatest rivers in the world is the reason why Amazon’s brand is now valued at nearly $5 billion[v]. The brand name and the establishment as the first major, successful online retailers created an equation for growth and long-term value. The Amazon brand name is exceptionally rare – for instance even though some usability metrics might find Amazon below The Book Depository (an Amazon subsidiary), Amazon’s brand recognition is far superior generating millions more in sales than usability[vi], proving the brand is rare and difficult to imitate in the online retail space.

Conclusion:

Amazon has successfully grown from a small web based book seller to a hugely successfully company selling everything from books to clothing to music. Amazon has positioned itself as a low cost alternative to brick and mortar companies which sell the same products. By leveraging economies of scale, Amazon has particularly been adept at keeping supplier price pressures at bay, while capturing an increasing large share of consumer sales. As the company faces strong competition from both online and retail based companies such as overstock.com and Wal-Mart, it will need to continue to refine its competitive offerings in order to provide the best customer experience possible.

Amazon’s long term success will be dictated by its ability to identify and anticipate consumer needs and trends, as it did with the Kindle and created products and services which allow the company to profit from those opportunities.