Amazon’s Evolving Business Strategy: From Books to Electronic Marketplace and Cloud Services
Amazon began as an online bookseller in July 1994 (Hartmans, 2021) in Seattle, when founded by Princeton graduate Jeff Bezos. Bezos sought out e-commerce after seeing that, at the time, the Internet was experiencing a growth rate of 2300% (Sadq et al, 2018, p.65). Gradually, Amazon started selling more variety. In 1997, Amazon started selling CDs and DVDs. In 1999, Amazon shared its vision to be “a place where customers can come to find and discover anything and everything they want to buy online.” Going into the 2000s, Amazon had become an online marketplace for a lot more than books, including housewares, toys, clothes, and electronics (Popomaronis, 2020).
Around 2000, also, Amazon launched Amazon Web Services (AWS) in order to address internal scalability issues, making their architecture and infrastructure based on decoupled API calls. Having to scale quickly, Amazon had learned how to manage low-cost datacenters and they became proficient at managing computer, storage, and database resources, which are at the core of AWS. In 2006, Amazon made AWS resources publicly available, making it the first public cloud offering, followed immediately by Microsoft, Google, IBM, and others (Miller, 2016).
Amazon’s strategy has always been to reach economies of scale with a strong site and repeat, loyal customers, growing revenue opportunities (Sadq et al, 2018, p65), and a customer-centric approach (Sadq et al, 2018, p66).
Competitive Forces and Value Chain Models
Value chain analysis is used to identify the activities that create value and the non-value add activities which support the business. Amazon excels at their core value-creating activities including logistics (inbound/receiving and outbound/shipping), operations, marketing and sales, and customer service. Supporting activities at Amazon include human resources, infrastructure, technology development, and procurement (Amazon Value Chain Analysis, n.d.). It is worthy to note that Amazon has converted its infrastructure from a cost-center and supporting activity to a revenue generating activity, AWS (Miller, 2016). Amazon gives value t its customers by receiving inventory, marketing, selling, and shipping inventory to them, followed by easy returns and customer service.
Michael Porter unveiled his Five Forces in a 1979 Harvard Business Review article where he defined the forces as threat of substitute products or services, bargaining power of buyers, threat of new entrants, bargaining power of suppliers, and rivalry among existing competitors (Institute For Strategy And Competitiveness, 2022).
Threat of New Entrants
Amazon is combating the threat of new entrants with its sheer economies of scale, amount of warehouse space, number of customers, number of products (Dudovskiy, 2022), and their own (the first) cloud platform, AWS (Miller, 2016). They are also thwarting new entrants through their maturity in the market. Since they entered the market in 1994, they started at the beginning of the public Internet and are now well established. Lastly, by offering literally everything a customer could want, they offer a marketplace similar to the current marketplaces of Target, Alibaba, and Walmart, which offer a diverse multi-supplier marketplace (Dudovskiy, 2022).
Bargaining Power of Buyers
Amazon offers several options through their marketplace at different price points, often supplied through different suppliers. By giving the customers so much choice over cost, they create an environment where they are going to make a sale. The price sensitivity of customers is noticed by the vendors in the Amazon marketplace that do not make the sale when the customer picks an item from a different Amazon seller. By creating this marketplace, Amazon appears to be on the side of the customer. Yes, customers can push for lower prices or may choose another entrant, like Wish.com, but Amazon gives a lot of differently priced options to keep customers on the site.
Bargaining Power of Suppliers
Due to the volume of Amazon sales and the revenue opportunities for product suppliers, as well as the non-exclusive diversity of product suppliers, the suppliers no bargaining power (Kasi, 2017). If labor is viewed as a supplier, then that is a risk. Recently, labor at Amazon has been unionizing, which gives the labor force bargaining power against Amazon (Selyukh, 2022).
Threat of Substitutes
There are many substitutes for Amazon as a marketplace, including Walmart, Target, Alibaba, eBay, Wish.com, and others. There are also many substitutes for Amazon as a public cloud provide, including Microsoft Azure, Google Cloud, IBM Cloud, and Oracle Cloud Infrastructure.
Rivalry Against Competitors
Rivalry is very high in the retail space and is also high in online retail. Stores like Target, Walmart, Alibaba, and Amazon are in a constant fight for market share and survival (Kasi, 2017).
Competitive Advantage of Amazon
Through diversity of products and massive scale and market dominance, Amazon is able to do well in all of its markets, from its e-commerce marketplace to its electronic reader (the Kindle), its audiobook store (Audible), its video and music streaming platform (Prime Video), and public cloud platform (AWS). Other vendors are creating similar platforms, but Amazon’s maturity and scale are the key factors for Amazon’s survival while facing market risks and competitors.
Amazon’s 5 P’s (Product, Place, Promotion, Price, and Profit)
- Product: Amazon has a wide range of products that they sell themselves in addition to other sellers in their marketplace. They have created a marketplace where almost anything can be bought.
- Place: Amazon is one of the few online retailers that can afford to purchase products from around the world and transport them to their customers, no matter where they are. Amazon’s logistics and shipping capabilities, in addition to their Prime delivery, make place a competitive advantage for Amazon (Rosoff, 2019).
- Promotion: The success of a business is enhanced by its website, which performs constant recommendations, A/B testing, and is customized to users’ shopping preferences and demographics. In addition, Amazon gets brand promotion via the media coverage (even of the unionization) and PR. A new company may have superior services but lack the financial resources to advertise them. Amazon’s revenue growth enhances its marketing capabilities.
- Price: Amazon purchases in bulk and stores them in their warehouse, which allows them to offer low prices to their consumers. They use economies of scale in their operations to lower expenses and provide cheaper goods than rivals. In addition, they can dynamically change prices to compete with other sellers in their marketplace.
- Profit: Amazon sets the pricing of goods that it sells, as well as the advertising and placement. In addition, Amazon takes a percentage of all sales from other sellers in their marketplace. They have a lot of control over the market and the amount of profit that they make.
Amazon Will Continue To Be Successful
Amazon will continue to be successful because they have so much market share in so many markets, they have a strong global presence, they have a ubiquitous cloud infrastructure that is heavily used on the Internet, and they have a warehousing and logistics capabilities that are more mature than any other online retailer. Even if one category, like the Kindle Reader or Prime Video failed, their marketplace and cloud infrastructure would prevail due to the scale, strength, and customer base.
References:
Amazon Value Chain Analysis. (n.d.). Wondershare EdrawMax. Retrieved from https://www.edrawmax.com/article/amazon-value-chain-analysis.html
Dudovskiy, J. (2022, March 25). Amazon Porter’s Five Forces Analysis. Business Research Methodology. Retrieved from https://research-methodology.net/amazon-porters-five-forces-analysis-2/
Hartmans, A. (2021, July 2). Jeff Bezos originally wanted to name Amazon ‘Cadabra,’ and 14 other little-known facts about the early days of the e-commerce giant. Business Insider. Retrieved from https://www.businessinsider.com/jeff-bezos-amazon-history-facts-2017-4
Institute For Strategy And Competitiveness. (2022, October 03). The Five Forces. Harvard Business School. Retrieved from https://www.isc.hbs.edu/strategy/business-strategy/Pages/the-five-forces.aspx
Kasi, A. (2017, June 20). Porter’s Five Forces Analysis of Amazon. Porter Analysis. Retrieved from https://www.porteranalysis.com/porters-five-forces-analysis-of-amazon/
Miller, R. (2016, July 2). How AWS came to be. TechCrunch. Retrieved from https://techcrunch.com/2016/07/02/andy-jassys-brief-history-of-the-genesis-of-aws/
Popomaronis, T. (2020, October 8). Jeff Bezos: Amazon turned into ‘the everything store’ thanks to an email to 1,000 random people. CNBC. Retrieved from https://www.cnbc.com/2020/10/08/jeff-bezos-amazon-turned-into-the-everything-store-because-of-an-email-i-sent-in-1997.html
Rosoff, M. (2019, December 13). Amazon will be the most important company of the 2020s. CNBC. Retrieved from https://www.cnbc.com/2019/12/13/amazon-will-be-the-most-important-company-of-the-2020s.html
M.Sadq, Z. & Nuraddin, S., & Hama, S.. (2018). Analyzing the Amazon success strategies. Journal of Process Management New Technologies, 6(4), 65-69. 10.5937/jouproman6-19264. Retrieved from https://www.researchgate.net/publication/328689933_Analyzing_the_Amazon_success_strategies
Selyukh, A. (2022, September 1). Amazon loses key step in its attempt to reverse its workers’ historic union vote. NPR. Retrieved from https://www.npr.org/2022/09/01/1116315891/amazon-loses-key-step-in-its-attempt-to-reverse-its-workers-historic-union-vote