Value Chain Analysis Essay
Value Chain Analysis
Value chain analysis is a method to review all the activities in an organization that contribute to maximizing competitive advantage and customer delight while identifying non value added waste and costs in the value chain process (Walter & Rainbrid, 2007). The purpose of this paper is to analyze Amazon’s value chain. Amazon’s mission statement reads as “our vision is to be earth’s most customer centric company; to build a place where people can come to find and discover anything they might want to buy online.” This paper will provide facts to analysis if this mission has been accomplished (“About amazon,”). The company was founded in 1994 by Jeffery P. Bezos. In the early years of Amazon they were mostly known for selling books. The idea behind it was that traditional brick-and-mortar stores could not hold more than a few hundred thousand books, whereas Amazon being an online store could hold an infinite amount of books (“History of amazon.com,”). Since its early days of being an online book store Amazon as grown to become a fortune 500 company with a global reach. Amazon operates in over 10 countries worldwide with over 88,000 employees (“Inside amazon,”).
Amazon is one of the most visited sites in the world, with over 500,000,000 monthly visitors, and over 100 million active members (“Top 15 most popular websites”, 2014). Amazon’s growth is deeply rooted in its value chain. Value chain represents the internal activates a firm engages in when transforming inputs into outputs. In this paper Amazon’s value chain processes will be reviewed. By understanding which activities Amazon engages an analysis can provide the reasons that Amazon has an effective competitive advantage and an increasing number of customer delight among its industry rivals. In 1985 Porter describes the value chain as the internal activities firms engage in to produce goods and services, these activities have been broken down into primary activities and support activities. Primary activities include inbound logistics, operations, outbound logistics, marketing and sales, and service. Support activities include firm infrastructure, procurement, human resource management, and technology (Jurevicius, 2013.)
The value chain can also be view as the combination of the demand and supply chain. The demand chain deals with the needs of its customers. Demand chain is defined as the complex web of business processes and activities that help a firm understand, manage, and create consumer demand (Walters & Rainbird, 2007). The supply chain deals with the relationship between the company and its suppliers. The supply chain is defined as the steps taking to get goods or service from the supplier to the customer. Since the demand and supply chain add value to the company, too fully analyze Amazon value chain, this paper will also include both supply and demand chain analysis.
Demand Chain Analysis
As stated above the demand chain are the processes and activities that come together to help a firm understand, manage, and create consumer demand. This section will analyze Amazon’s demand chain. It will identify the customers, market, wants and needs, market opportunity, and value drivers. Amazon’s understanding of its demand chain has been critical to its success over the years. Amazon’s demand chain as ensure a level of customer satisfaction highest in its industry. Amazon’s customer satisfaction rating it at 88 percent, this is above the industry average rating of 78% and of its leading competitors (“ACSI”,).
Identification of Customer, Market, Wants and Needs
Amazon is an e-commerce business, which means it has a wide range of customers. The company’s target market is all users that shop online. These are the individual that don’t have time to shop at traditional stores. Also many of Amazon users are unable to find their desired product in their local area. With the new fast pace world Amazon customers are accustom to using technology to do their everyday tasks, this includes shopping. Amazon offers a wide range of products from books to apparel and jewelry to consumer electronics. Amazon has come a long way from just being known as an online bookseller. It has become the “Everything Store” with around $75 billion in annual revenue, a $140 billion market value.
It has launched a marketplace in India, opened a website to sell high-end art. Also with its Kindle and other tablet products to rival other competitors and also providing web services. From this we can see that Amazon is trying to break into all markets (Stone, 2013). Amazon has spent millions of dollars in its marketing approach to its customers. Amazon uses a personalized e-mail system to market its deals to its customers based of their past browsing history. Also once a customer log back into their Amazon account they will see personalized listed of items they may be interested in purchasing.
Market Opportunity Analysis
Amazon has a great deal of market opportunity. This section will review Amazon market opportunity analysis. A market opportunity analysis is defined as “a planning process that focuses on identifying future opportunities and assessing the organization’s financial, technological and competitive readiness to exploit them” (“Investorwords”,). Amazon’s SWOT analysis shows that there are a few potential opportunities for the company to invest in; some are already in the process others are still under review. A few of these opportunities are; developing an online payment system, the payment system will be a great benefit to the Amazon customer that use their smart phones and are not in a position to input their bank information.
Opening more online stores in other countries. Amazon is a growing household name and with the increase in the accessibility of the internet in growing economy this will give Amazon the ability to expand into new territory and markets which in return increase its market share and profitability. Also increasing its services and product portfolio through development and acquisitions, the company has already started to increase its portfolio with the introductions of its kindle products, and it is looking to move into the TV/Film industry with Amazon Studios (“SWOT analysis of Amazon”, 2013).
Identification and Analysis of Value Drivers
The term “value” refers to the total value created for all parties involved in the transactions that a business model enables. Value can be measured as the sum of the values that can be appropriated over all participants in the business model and over all transactions enabled by the business model. The term “value drivers” refers to a factor that enhances the total value created by a business model. Amit and Zott broke value drivers into four factors; efficiency, complementarities, lock-in, and novelty (Amit & Zott, 2000). Efficiency goes up when the costs per transaction goes down. Amazon as increased its efficiency by investing money into its system to make the site user friendly with a wide range of selections. Providing a greater selection of items at a reduce cost, and its partnership with UPS it has been able to decrease its order fulfillment time. Complementarities are offers that are bundled together, when purchasing items on Amazon there is a small section titled recommended items.
These are list of times that are related to the items being purchased this increase value because it decrease the time the customer are looking for other times, thus saving the customer time by bundling the items together. The lock-in value driver refers to customer retention. Amazon as locked in a core group of users by offering great deal with loyalty programs and creating a safe trusted interface where customers can complete transactions and not worry about their information being stolen. The last of Amit and Zott value drivers is novelty. They define novelty as “innovations as the introduction of new products or service, new methods of productions, distribution, or marketing, or as tapping new markets. Amazon as excel in all the above with its introduction of the kindle, expanding into the art world, and creating new distribution channels; thus increasing customer satisfaction through its value driver (Amit & Zott, 2000).
Value proposition is a clear, compelling and credible expression of the experience that a customer will receive from a supplier’s measurable value-crating offering. Value proposition should emphasize both the benefits the customer will receive and the price the customer will be charged as compared to the competition. A strong value proposition can create a strong and effective competitive advantage (“Value proposition (VP),”).
Value Proposition as related to Demand Chain
The value proposition as related to demand chain comes in different forms. Amazon has a large selection of product which meets the needs and wants of its customers. The company use technology to track of their customer’s preference. The company offers its users the best customer service. When a customer experiences dissatisfaction it goes to the top of the chain. CEO Jeff Bezos gets involves and demand an explanation for how this occurred. In a Bloomberg BusinessWeek article it explains that Amazon is built to adapt. Finding new ways to serve its existing customers and expand to new customers in ways.
By identifying value that are important to the customer’s needs that have not be served as of yet. CEO Jeff Bezos says “if you want to continuously revitalize the service that you offer your customers, you cannot stop at what you are good at. 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” (Johnson, 2010). With the technology in place and the drive of the company to meet the needs of its customers at all level shows a strong value proposition on the demand side.
Value Proposition as related to Supply Chain
Amazon’s value proposition as related to supply chain is based of its low cost prices for high selection of goods. Their partnership with key suppliers allows Amazon to maintain very little physical inventory. With technological advancement Amazon as designed unique systems that entirely automates it product ordering system that is linked with its supply. This allows them to minimize human intervention reducing cost and also speeding up the ordering system (“Customer value propositions,”).
Supply Chain Analysis
A supply chain is defined to be the processes whereas raw materials are converted into final products. The supply chain just like the demand chain is critical to the success of the value chain. It is the successful combination of both supply and demand chain that adds value to a company. The supply chain is comprised of two integrated processes; the productions planning and inventory control process, and distribution and logistics process (Beamon, 1998). Amazon supply chain consists of inventory segmentation, order sourcing, fulfillment, and transportation (Chiles & Dau, 2005).
Value Production and Coordination
Production is an important part of the supply chain. In terms of Amazon’s supply chain the production part is an expensive component. Although Amazon doesn’t produce most of its inventory it is critical for its success that the suppliers it does business with are producing products of the highest quality. Its business model has provided it with the ability to negotiate lower prices with its suppliers to over its users the best deals. Amazon ordering system it top of the line; with the ability to automatically order products once inventory is low to keep up the demand.
Amazon ships millions of products every year. Being an online story with no physical location having an effective delivery system is key to success. Amazon offers different shipment options, from same day, next day, to standard. Amazon is able to deliver orders its customers in two forms, from its warehouse and distribution centers and also directly from suppliers through partnership with distributors, publishers, manufactures, and other partners. This adds great value to the company’s supply chain (Chiles & Dau, 2005).
Amazon puts great pride in its customer service. In a Forbes article the author states that Amazon has been the driving force behind the growth in e-commerce and the evolution of customer service excellence in the modern day. Customers have used words such as “efficient”, “reliable”, “easy”, and “hassle free” to describe Amazon’s service. Amazon rated #1 in an Customers’ Choice Award by the National Retail Federation, beating out traditional brink-and-mortar retailers like Khol’s and JC Penney (Goodfellow, 2012).
Enterprise value is a measure of a company’s value. Enterprise value is calculated as market cap plus debt, minority interest and preferred shares, minus total cash and cash equivalents. Enterprise value is basically what a company is worth to another company, in a buyout situation. If eBay wanted to buy out Amazon it would have to raise $159.03 billion to takeover Amazon, as of now eBay’s enterprise value is $71.18 billion. eBay is not even in the same ball park (“Amazon.com Enterprise Value”, 2014).
Industry drivers are all factors that affect how a business operates, such as economy, environment, political, and the market itself. Amazon industry’s drivers are price, quality, availability, and customer service. In the online retailing industry companies try to use price as there biggest industry driver. But from Amazon it is its’ customers, Amazon believe with a focus on its customers it can be able to provide them with all of the drivers, such as price, quality, logistics and great customer service.
Competitive advantage is the advantage a firm has over its competitors. Competitive advantage can be in two forms cost advantage and product advantage. Amazon’s competitive advantage comes from its strong value chain. Amazon has been able to keep its advantages by tapping into both forms of advantages. Amazon offers its customers the lowest price on products with its strong and effective supply chain. The system it has developed allows the customer to directly order from the supplier anywhere in the world at the lowest price possible. Amazon’s business model allows the company to negotiate the lowest price with supplies and passing those savings on to its customers.
Amazon not only has a cost advantage it also has a product advantage. Being an online retailer that started out with selling only books has now expanded into many other departments. Compare to one of its biggest competitors Barnes and Nobles, it is able to offer more selections in books due to its unlimited storage space. Also with its kindle tablet it saves customers a trip to the store and allows them to download instantly. Amazon’s greatest competitive advantage is its customer service, which has ranked #1 year after year (Goodfellow, 2012).
The business dictionary defines customer delight as the very favorable experience of the client of a business when they have received a good or service that significantly surpasses what they had initially anticipated (business dictionary, ). Amazon already has great customer service proven by all the awards it has earned. Amazon wants to truly be “Earth’s Most Customer-Centric Company.” The company not only provides extra service like free shipping, but its customer service is its key to bring its customers that extra delight. The way Amazon handles problems that arise are a big part to its customer retention rate. They have revolutionized the “Contact Us” experience, if they is a problem with a customer’s order they can go to the site and under the contact us page they will find a “call me” button. This is Amazon’s way of having a more impactful experience for its customers. Instead of having to talk to a computer, you can leave your number and a live human being will call you back to resolve you issues with the upmost respect (Hampton, 2013).
This paper has analyzed how Amazon brings its supply chain and its demand chain together to create an effective value chain. A chain is as strong as its weakest link, and Amazon has effectively strengthened all aspect of its value chain. It truly is “Earth’s most customer centric company.” All these factors put together has helped it create such a competitive advantage in its industry with an enterprise value of over $150 billion. For these reasons the company has been seeing constant growth both in the number of users and number of new service because it believes in improving on everything.