Amazon is the world’s largest e-commerce company. It was founded by Jeff Bezos in 1994 (Amazon, n.d.) and the website went online on July 16, 1995 (Webley, 2010). Amazon has its headquarter in Seattle, Washington and several offices on all continents. (Amazon, n.d.) At the beginning Amazon sold only books and after a period of development they expanded into a wider range of products such as multimedia products, household items, toys, clothing, jewellery, sporting goods and grocery (Amazon, n.d.). In the following the business strategy of Amazon is analysed in regard to a theoretical background. First of all, Amazon’s strategy is examined in terms of Porter’s Five Forces and Generic Strategies. Moreover, Amazon’s internationalisation strategy is examined including the obstacles they might face in their development process and how those can be overcome. Furthermore, economic theory is used to evaluate the aspects of market power and competition.
2. Analysis of Amazon
2.1. Amazon in Porter’s frameworks
2.1.1. Porter’s Five Forces
It can be recommended to organisations to analyse the environment they operate in. This can be done on several levels such as the macro-environment, industry, competitors and the organisation itself. When analysing the industry the model of Porter’s Five Forces is an appropriate tool. It includes the five competitive forces threat of entry, bargaining power of buyers, threat of substitutes, bargaining power of suppliers and competitive rivalry.
Figure 1: The five forces framework (Tanbots, n.d.)
Threat of entry describes the level of barriers that need to be overcome by new entrants in an industry. The typical barriers are (Johnson, Whittington, & Scholes, 2011): Scale and experience
Access to supply and distribution channels
Legislation or government action
In the case of Amazon the barrier scale and experience is the most significant. Amazon is the largest online retailer (Netonomy.NET, 2013). As a consequence they operate on a very large scale which results in economies of scale and other cost advantages. For a new entrant it would be very difficult to achieve this from scratch as this would requires large amounts of investment. As a new competitor in this sector does not have those cost advantages it is very likely that they have to charge higher prices. Amazon is in business for almost 18 years now which is comparable long for any online company. During this time they were able to build up a lot of valuable experience which is likely to be reflected in their cost curve as well. “A substitute performs the same or a similar function as an industry’s product by a different means.” (Porter, The Five Competitive Forces That Shape Strategy, 2008) The threat of a substitute is high when it offers an attractive price-performance ratio and when the buyer’s switching costs are low. (Porter, The Five Competitive Forces That Shape Strategy, 2008) Switching costs are very low because it does not make a difference to the customer where they buy their books, music downloads or kitchen appliances just to name a few. The product is either the same or very similar.
So customers have the free choice where they want to purchase their products. However, there might be high emotional switching costs as customers built up a high loyalty in the past. Amazon makes use of this with their Kindle for example. There are many e-book readers available but when a customer purchases the Kindle they are also going to purchase their e-books from Amazon because then switching costs would be high as they would need a different e-book reader. This is a mean for Amazon to counteract the threat of substitutes. Suppliers can put pressure on companies by either reducing the quality of the good or service or by raising prices. The bargaining power of suppliers is high when one or more of several key elements are given such as the industry is dominated by only a few suppliers, the product is unique or differentiated and the industry is not an important customer of the supplier. (Porter, How competitive forces shape strategy, 1979) In the case of Amazon the bargaining power of suppliers is limited. On the one hand the power of suppliers is high because Amazon depends from their suppliers in the sense that books for example are usually not offered by a large number of different publishing companies.
The same is true for the multimedia sector. So those suppliers could increase prices. On the other hand with Amazon being the largest online retailer it is a major customer of the industry. Publishing companies for example cannot risk to lose Amazon as a customer. Customers can pressure the companies to reduce prices, increase quality of the product or service and play competitors off against each other if they have a high bargaining power. (Porter, How competitive forces shape strategy, 1979) The key issue in the case of Amazon is that most of their products are standard and undifferentiated. As a lot of competitors in the online market as well as in the high street sector offer the same or very similar products customers can easily play competitors off against each other or demand lower prices. Due to those facts customers have a fairly high bargaining power.
Rivalry among existing competitors is very high as Amazon has not only to compete with other online shops but also with high street retailers. Amazon offers a wide range of products and they are faced with different competitors across their product categories. There is only one factor that differentiates Amazon from the other retailers which is that Amazon offers such an immense range of products.
2.1.2. Generic Strategies
Companies can develop a competitive advantage either in having lower costs than competitors or by product differentiation so that customers are willing to pay higher prices for that unique characteristic. The strategies that are developed to achieve this can either focus on the broad or narrow scope. (Johnson, Whittington, & Scholes, 2011)
Figure 2: Generic Competitive Strategies (Burgeen, 2013)
With Amazon being the largest online retailing company it is clear that they focus on the broad scale and try to target as many customers as possible. The two possible strategies to develop a competitive advantage are therefore cost leadership or differentiation. Most of the goods and services that are sold by Amazon are standardised and undifferentiated. As Amazon does not produce the goods they sell it is not possible to develop a competitive advantage in terms of a differentiation strategy. As Amazon operates on such a large scale which makes it possible to achieve economies of scale and with some degree of bargaining power towards their suppliers it is quite obvious that cost leadership most likely to be the strategy that Amazon pursues that the moment.
However, Amazon is always seeking to develop something unique mostly in the area of customer service. At the moment, they are developing a drone that could deliver small packages to the customers in 30 minutes or less (Amazon, n.d.). This unique service is a mean of differentiation to other online stores for which customers are certainly willing to pay a higher price. This strategy of cost leadership and developing new unique features can ensure that Amazon maintains their competitive advantage.
2.2. Modes of entry
The selection of transactional corporation of entry modes was impacted by a variety of integrated factors. These multinational firms have the advantages of technology, scale and fund to entry a new market and area (Chan et al., 1992), for the party to accept, these multinational companies not only promote the development of economic and technology, but also bring a lot of employment opportunities for these new market. And at the same time, for the party of multinational companies which will extend a new area, and scale for their business, fuse with the local technology habit and culture can also make the company become more diversified, bring more benefit for the company. Like the Amazon, which include 3 subsidiary corporations respectively are Alexa Internet, A9 and Internet Movie Database, IMDB. And its development strategy is vigorously develop enterprise diversification, make it more competitive and better integrated into the international market. In the theory of entry model, there have several points which respectively are Licensing or franchising, Joint venture, and Wholly owned subsidiary.
2.2.1. Licensing or franchising
For the part of licensing or franchising, which means the franchise owners in the form of the contract, franchisees are allowed to be paid for the use of its name, trademark, proprietary technology, operational and management experience to carry out commercial activities. Since Amazon as an E-commerce sale platform and already involved with a number of product areas, then which can cooperate with other product firms, especially when they entry a new country of market, collaborate with the local enterprise and brand which was known by native is the fastest way to fit in these market, and also these Products manufacturer named amazon’s name will lead to better development. But the barrier of licensing or franchising is also exists, for example, these franchise and franchisee business ideas and products form may not conform to the principle of amazon’s brand, then these differences about management idea may be will bring conflicts and contradictions to each other. Then in order to prevent problem like this happened, Amazon on the aspect of international development should make full of investigation and examination before cooperation when they prepare to into a new market of country to avoid these problems.
2.2.2. Joint venture
At the part of Joint venture, when an enterprise prepare to entry a new market, shall make a research about the condition of this industry in this market, whether have the condition for the development or already over-saturated. So how to competition with local enterprise, how to be accepted by native and how to stand out are the most important problems that Amazon should be consider, and with the object of joint venture may also produce interest on the friction. But through joint venture will save lots of cost and time on the part of adjustment period, Amazon can use a certain technology, experience and talent which come from the object of cooperation. Reduce the risk caused by the poor preparation, distribute respective benefits at the same time, and also can draw appropriate management experience and local development, lay the foundation for the next market.
2.2.3. Wholly owned subsidiary
In addition to Licensing or franchising, Joint venture, there is a better way of freedom to control which is Wholly owned subsidiary. It refers to a subsidiary fully owned or controlled by only one parent company, and there are exist two ways to set up subsidiary: first is set up a new firm from the beginning and construct a new set of production equipment; second is purchase an existing firm and its equipment. So Amazon should also develop like the other transactional corporations, through after a long period of survey and investigation about the condition of development in this area, through the acquisition of local companies or set up a new subsidiary to complete the integration with the local market, for example, amazon used to announced a $75 million deal to buy “joyo.com”, will be for amazon joyo, under a wholly owned subsidiary in China(Wang, 2012), which rely on the strong platform and group advantage of Amazon, so in the management and operational funds aspects without having worry. But the through this way will spent a huge of money, then Amazon should planning in this aspect prudently, comprehensive estimation its operating situation and development prospect.
Establish a wholly owned subsidiary of the company also need to take a lot of resources, so the risk what faced by Amazon may be high. One of source of risk is the target market of political or social uncertain or instability, and some risks like these may cause harm on company material property and personal safety when it become more serious, as long as fully understand the targets market of customer before they entering, the parent company will decrease these risks.
3. Individualized Pricing
3.1. Analysis of individualized pricing
With the advent of online retailers and comparison sites, product price becomes more transparent for consumers. In order to effectively promote products in sales, enterprises must develop effective strategies of pricing for the market, such as individualized pricing. In the age of electronic commerce, production can be product personalized service. So the individualized pricing also appears. Individualized pricing let consumers to choose the individualized products they wanted and pay the price. Although personalized pricing can enhance profits largely, many companies still hesitate that customers will feel the individualized pricing is unfair. There is a case about ‘Amazon’, which is an online shopping company. In 2000, customers have found that Amazon charge different prices to different people. For the some one DVD, the price to new customer is lower than that to old customers by four dollars. Amazon’s explanation is that this is a random discount for different customers.
Based on customer’s response to discount, company re-measures the price of products for each customer. From the result, the customer feels that they buy more frequently, the price become lower. This makes regular customers satisfied. It is obvious that the company want to compete with other opponents by using the strategy of individualized pricing. Today, customers can compare the products from different stores. Then, they can buy the necessary goods online at a lower price. In recent years, the only way to ensure efficient pricing is to use a dynamic way such as the individualized pricing. This means that retailers need to understand the value of customers and how to obtain the loyalty of customers. By analysis the situation of market and customers, the companies can make the efficient price of products to absorb consumers. Due to most retailers heavily dependent on competitive prices, they try to keep the same price or slightly lower prices than that of competitors.
The companies can obtain higher market share. But some companies abuse the market power, they dominate market by reducing product’s price. This behavior will be prohibited by the Office of Fair Trading (OFT), which is a non-for-profit and non-ministerial government department of the United Kingdom. It enforces both consumer protection and competition law. Therefore the individualized pricing has both advantages and disadvantages. It depends on how the companies use this method. Appropriately using of individualized pricing can promote activeness of market. If individualized pricing is excessive, it will become the abuse of market power. The OFT acts as the UK’s economic regular. 3.2. Government’s role
Government has played a leading role in maintaining fair competition in the internal market of retailing sector, which requires competitors competition of fair, just, open, equal and orderly with rivals, then which means to follow the principle of fair competition, and the principle of fair competition, so follow the survival of the fittest, for the country of internal aspect, the government always played the role to maintain market fair competition, the enterprise operation and so on. But also in some other special circumstances, like in order to protect domestic industries then form a monopoly to resist the invasion of foreign industry, using economic and legal means to create condition for the internal retail enterprise in market competition, at the same time, promoting its development abroad when it has sufficient capacity.
Competition on the international market, when excessive foreign enterprise brand occupies a certain market share of the product, the government should implement the corresponding protection measures to cultivate the local retail brands, this can better promote the healthy development of domestic enterprises. Government can make laws or raise taxes in order to limit the foreign-owned enterprise to enter the local market, but in taking measures should be multi-faceted and carefully implemented. Excessive restrictions could cut competition consciousness between local businesses moreover can form local monopoly enterprises, but if the limit of foreign-owned enterprise is not enough, it may only effect the resource and product flow in the market environment. EU retail and wholesale industry annual output value accounted for 11% of EU GDP, providing nearly 30 million jobs, accounting for 15% of total EU employment.
Enhance the competitiveness of the retail industry is essential to ensure the European Union’s economic growth and employment, so in addition to developing their own factors of each local enterprise, the government should vigorously developing its regulation function to balance the market competitiveness and create a good market environment for each of the retail enterprise’s development.
Amazon as the one of most largest and popular e-commerce should select which way of entry modes cautiously when they development internalization strategy. Fully do the preparation before entry a new market, through authorization, the establishment of joint ventures or subsidiaries gradually penetrated into new markets. The model of future business will be global. Amazon operates in a very competitive environment as there is a high level of rivalry among competitors such as other online stores and high street shops. Additionally, there is a high threat of substitutes as well as high bargaining power of buyers. However, Amazon recognized that being the cost leader does not ensure having a competitive advantage in the future. This is why they try to develop new features in the sector of online stores in order to be able to add something unique to their mainly standardized products. This is their mean to maintain their position as the world’s leading online store.
Due to the price of products has a strong influence on customers, price has become the key to ensure business and customer loyalty. Individualized pricing becomes more popular. Undoubtedly, some retail providers can establish the customer loyalty and obtain more profit. But the using of individualized pricing still needs to be supervised. Otherwise, it will cause the abuse of market power. So this is the significance of OFT and government. The government should be regulated according to different market situations, creating a fair competitive environment for the retail market and avoid vicious competition which may arise.
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