The threat of substitute products is the possibility that a competitor invents or offers a product that appears to be different but actually satisfies the same need as a certain existing product.
Buyers may have an effect to the industry through their aptitude that they are able to force down the prices. That means that they may have a bargaining power for higher quality or more services in order to play competitors against each other. The power of the buyers is determined by factors such as little changing costs to other suppliers, the purchase of a large amount of seller´s products, the potential to integrate backwards or the plenty of alternative suppliers and so on.
The bargaining power of the suppliers means that this group may have the ability to raise prices or reduce the quality of needed goods or services. This bargaining power is high in case that the suppliers industry is dominated by few suppliers, that a needed product is unique with high switching costs, that substitute products are not readily available or that suppliers are able to integrate forwards.
And last but not least, the relative power of other stakeholders such as governments, local communities, creditors, special interest groups or complementors etc. That means that for example complementors have power because they have a product which works well with a firms´ product and without this product the purchasing company would lose much of its value.
Organizational Analysis
Analyzing an organization refers to identifying and developing organization´s resources and competencies. This process is done in several steps like the following image shows.
Business Models
A business model is the technique with which a company gains money in their business environment. There are five elements a business normally composes. These are:
- Who is served
- What is provided
- How money is gained
- How a company differentiates and sustains competitive advantage
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How a company provides its products or services
Value-Chain Analysis
“A value chain is a linked set of value-creating activities that begin with basic raw materials coming from suppliers, move on to a series of value-added activities involves in producing and marketing a product or service, and end with distributors getting the final goods into the hands of the ultimate consumer.”
Every single Company has its own and individual value-chain. This value chain is divided in two kinds of activities. These are the primary activities like inbound, operations, outbound, marketing & sales and services and the support activities such as firm infrastructure, human resource management, technology development and procurement.
Core and Distinctive Competencies
Core competencies are a collection of competencies that crosses divisional restrictions, are extensive within the corporation and is something a company can do extraordinarily well. When a corporation has competencies which are superior to the ones of the competitors they have distinctive competencies. That can be through value, cost, robustness or links. When a company has build its distinctive advantage it leads to a competitive advantage as well as critical success factors with which they can order winning or qualifying criteria.
Management Strategies
There are three different levels of Strategies for businesses. These are the Corporate Level, the Business Level and the Functional Level Strategies.
Corporate Level Strategies determine the direction in which a company wants to go. Therefore companies need to decide between a Concentration strategy, a Diversification strategy, a Expansion strategy or a Vertical Integration strategy.
Business Level Strategies deal with the issue either following a low cost strategy, a differentiation strategy or a focus strategy in direction differentiation or low cost.
The Functional Level Strategies indicate how a function respectively a department, like Marketing, Financial, R&D, Operations or Logistics, of a business intends to achieve its goals.
Example: Amazon.com
History of Amazon.com
Amazon.com Inc., was founded 1994 in Seattle, Washington by Jeff Bezos. Operating as an online book retailer, Amazon.com has grown rapidly since first opening its Web site in July 1995. At the beginning there were few online book sellers already in the business. Because of the reason that many people at this time were not familiar with the world wide web and just focused on using e-mail the business model was that people could order books via e-mail. At this time Bezos wanted to gain an advantage by differentiating from competitors. The mission at this point, was to use the Internet to transform book buying into the fastest, easiest and most enjoyable shopping experience possible. Through that Amazon enjoyed a tremendous first-mover advantage, which continued until today.
Amazon.com, today offers the Earth's Biggest Selection. The company aspires to be the Earth's most customer-focused company, where customers can find and discover anything they might want to buy, and makes an effort to offer its customers the lowest possible prices. Amazon.com offers thousands of products in categories such as books, music, DVD’s, electronics, tools, kitchen, home and garden equipment, toys, apparel, accessories, health and personal care, etc. and operates on over two million square feet of warehouse space.
Industry Analysis of Amazon.com
The main competitive factors in the e-business segment in which Amazon.com is operating include selection, price, availability, convenience, information, brand recognition, personalized services, accessibility, customer service, reliability, speed of fulfillment, ease of use etc.
The societal environment of Amazon.com
Amazon.com as well as many respectively all other traditional companies are sensitive to the general environment like in the following aspects shown:
Economic environment: For instance since the United States has recovered from the impacts of the 9th September 2001 the ongoing economic growth stimulates the populations´ consumption. Another economic force is that the unemployment rate increases and the customer confidence levels decreases.
Technological environment: Nowadays Internet software technologies on the one hand go further than theory and experiments and on the other hand focus on developing robust applications for large-scale. As well, the costs for storage devices drop significantly and gigantic interactive dynamic databases are possible on both software and hardware level. Furthermore the technologies like for instance computer technology changes fast.
Sociocultural environment: Personality and individuality are more emphasized and consumers are willing to spend more money on products that are individual or make them feel extraordinary.
Political-legal environment: There are different taxation laws in the countries Amazon operates for example.
The task environment of Amazon.com
The rivalry among existing firms in the business Amazon operates is high. Competitors of Amazon.com are physical book stores, wholesalers, publisher, mail order retailers and online book sellers. Book sellers such as Barnes & Noble or Bol.com, online retailers for games respectively pc games, pc hardware, clothes and all the goods which are momentary offered at amazon.com like BestBuy, Wal-Mart, Costco or Homedepot and online auctions like eBay or mail order houses like Bertelsmann.
In the industry in which Amazon is operating the threat of new entrants is also high. The reason for that is that the infrastructure is not as expensive as for a physical book store and already existing book stores which look forward to expand to the internet already have an established customer base, as well as brand and market recognition.
The bargaining power of the buyers is high as well because the there is a high number of options to purchase any given book. Another reason is that this industry is based on the fact that the customer is king.
High is also the bargaining power of the suppliers because publishers usually serve several other physical stores and have an established customer base. A further reason is that warehouse owners and wholesalers may service end-customers directly.
The threat of potential substitutes is large because physical book stores already have an establishes brand name as well as clientele and some customers may not be as comfortable buying a book over the internet as visiting a physical book store. In addition, new technologies and the expansion of existing technologies may increase the competitive pressures on online retailers.
Organizational Analysis of Amazon.com
The Business Model of Amazon.com
Cf. Wheelen (2005), p.10-4
The products Amazon.com offers include books, music, DVD’s, electronics, tools, kitchen, home and garden equipment, toys, apparel, accessories, health and personal care, etc.
Amazon wanted to get the most complete retailer possible like Bezos says in one of his statements:
“We want to build up a place where people can come to find and discover anything they might want to buy online. You realize very quickly that you can´t sell everything people want directly. So instead you need to do that in partnership with thousands and indeed millions of third party sellers in different ways. To try to do that alone, in strictly a traditional retail model, isn´t practical.”
Amazon has beside the partnerships with other retailers and investments in some online retailer’s, offers like auction services and a store-hosting program for small- and medium sized businesses which is named zShop. In these shops businesses have a website to sell their products. Amazon gives the guarantee that the ordered product will really reach the customer. Both, the merchants as well as Amazon have a benefit. The merchants have a already established platform where they can offer their products to loyal customers and Amazon gets a wider product range. A further Service Amazon provides are the Web Services where they allow merchants to use Amazon´s patented technology on their own website.
Amazon never segmented their customers by demographics. 2002 the company divided their customers in four categories which are:
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Seniors: This group was born before or during the Second World War. Amazon offers mainly low prices and excellent customer service to this group.
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Baby Boomers: This customer group was born between 1946 and 1964. Amazon offers mainly products like books, home and garden products, kitchenware and apparel to this group.
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Generation X: This group was born between 1965 and 1976. The main products offered to this group are books, kitchenware and apparel.
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Generation Y: This group includes people born between 1977 and 1994. To this consumer group, products like apparel, music, books, toys and games for game consoles are offered.
The customer services which is provided to all groups are product recommendations, a program called share the love, where consumers can recommend products to their friends, a A-Z guarantee which contains that the consumer can feel safe during the complete transaction, a safe shopping guarantee which protects the consumers to be able to have a safe purchase with a credit card. Furthermore Amazon offers Payment options to relieve the transactions with their partners. That means that there are no additional fees when consumers buy products from partners. Consumers just send the money to Amazon and as well have a A-Z guarantee, and Amazon does the remaining transaction.
According to the Sales and Distribution Amazon needed to develop a system with which it is easy to navigate as well as to order goods. Therefore Amazon invented the 1-Click Ordering method. This method allows the consumer to store billing and shipping information on the website. There is also the possibility given to pay in several ways such as by credit card. The consumers can also choose between multiple shipping addresses such as home and work. Amazon prefers it when customers use this program because it is possible for them to create profiles of the buying behavior. Moreover Amazon can develop future product recommendations and marketing programs. In order to make sure that the consumers receive the desired goods easily, Amazon offers a variety of shipping options such as by UPS or FedEx. The shipping price actually depends on the level and speed consumers desire to receive a product. But when a customer reaches a minimum purchase price the delivery is for free. In addition to the delivery Amazon provides the service on the website that consumers can watch the delivery-stage in which the ordered goods are. And in case a customer ordered a wrong or not anymore liked good at the time of receiving, Amazon makes all necessary shipping information available on the website so that it is uncomplicated to send the good back.
Because of the reason that Amazon is an online retailer technology plays a significant role. In 2003 Amazon.com followed the strategy to focus its development efforts on creating and enhancing specialized and proprietary software which is unique. With this software it is possible to accept validating consumer orders, placing and tracking orders with suppliers, managing and assigning inventory to customers’ orders and ensuring proper shipment of products to customers. Amazon relied on trademark, copyright and patent law according to its trademarks, service marks, copyrights, patents, domain names, trade dress, trade secret protection and license agreement with employees, customers, partners and others to protect its proprietary rights. Because of the high risk of hackers Amazon uses Secure Sockets Layer (SSL) Software to ensure a secure credit card purchase over the internet. Furthermore an Amazon.com PDA version was developed to enable, that users of these more and more popular devices can use Amazon.com.
Amazons´ advertising activities include television & radio, prints and the internet. The company first wanted to differentiate from their competitors through television and radio advertisement. High amounts were spent into this advertising segment between 1999 and 2001 till it was realized that it is more effective to drop the prices of goods and concentrate more on online ad activities such as product recommendations and search engines. Another cost effective way for Amazon.com to inform customers about product offerings is by using direct mailings, newspaper advertisement or circulars.
The regions in which Amazon.com operates are the United States, Canada, France, Germany, Japan and United Kingdom. Therefore the company has set up a separate website for every country.
The internal environment of Amazon.com
Actually Amazon’s resources are primarily intangible: Customers recognize its brand and website as synonym of online shopping. As a result of perennial evolution, the friendly web interface guarantees unique shopping experiences. Unparallel quantity and quality of user reviews attract potential customer, and provides rich information on merchandise popularities as well as user preferences. A mature and sophisticated logistic and operation system minimizes the storage and shipping costs.
The Value-Chain of Amazon.com
By looking into Amazon’s value chain, the following activities are identified as value-creating: In primary activities, the marketing is one of the most value-creating activities. In addition to that the recommendations to products is value creating. Also the operations and logistics are value-adding. Furthermore Amazon adds value by acting as a marketplace for other sellers that supply further merchandises and services beside its own. Another value crating activity was that Amazon built its own warehouse to be able to increase the speed and reliability of its delivery of online orders.
In support activities, the technology development is unquestionably the most value-adding. In addition, a proper firm structure is also value-adding.
Core, Distinctive Competencies & the competitive advantage of Amazon
The Core Competencies of Amazon.com are the developed brand, low prices, the customer service, the wide product range occasionally through the partnerships and the technology according to for example the unique 1-Click Ordering method.
Amazon´s Distinctive Competencies are the low prices, the technology and the unique customer experience.
Therefore, Amazon’s core competitive advantages lies in two aspects:
- Low prices: secured by its relatively low costs because its operational model saves significantly on human resources and logistics costs.
- Unique customer experience: originated from its website and database design and the knowledge of customer preference.
A critical success factor in the case of Amazon is that, the wider the product range growths the easier it is for competitors to enter a specialized segment.
SWOT Analysis of Amazon.com
Amazon´s Strategies over the last years
First of all Amazon´s structure is a network structure and the company acts like a coordinator of this value chain. The Company was one of the first companies going online, started selling books and after some time went into related product fields like music and movies. Amazon always had the philosophy to differentiate from their competitors through the product line they continuously expanded and still expand as well as through superior customer service. Additionally the company was constantly focused to offer the best price. To be able to expand the company was registered at the stock exchange and used 1999 the high stock price to fund purchases of other online retailers like Drugstore.com, Homergrocer.com and Pets.com. That was a great mistake because it took just one year till these online retailers went bankrupt. After that Amazon changed respectively restructured its strategy and started expanding through partnerships which gave them the possibility to enlarge their product lines without further costs. Furthermore the invented selling technologies like the 1-Click ordering method was used by their partners and brought extra profits. Additionally the partnerships made it possible for Amazon to offer a greater product variety and as well Amazon´s products were offered on the partner website. Another strategic change took place in 2002 when Amazon decided to cut advertising cost by concentrating on print and internet advertisement and not anymore on television advertising. There through Amazon could offer permanently the best price because the company on the one hand didn´t need to run shop and pay the necessary employees and on the other hand they focused on less expensive advertisement.
Conclusion
I think it is possible to use a Value-Chain analysis to find out the core & distinctive competencies of a business which is operating in the e-business. The structure is particularly not comparable to the one of a traditional business. Marketing is in the same way value creating. A difference is that technology in the e-business has a much higher impact. E-business is based on technology. Also the Supply-Chain has changed. The procurement is much easier because of for instance paperless processes or electronic bill payments and there through more efficient. So summarizing the internet is changing the value chain of companies which operate in an e-business. Companies are more focused on support activities because the great opportunities through technology for instance.
According to the strategy, I think it is necessary to stay flexible because like the example of Amazon shows it is not possible to keep a competitive advantage without adapting changes. Actually Amazon changed its strategy very often. The company followed trends like forming partnerships, more and more customization and technology as well as customers service developments and there through stayed competitive. The only point what Amazon never changed is the vision, to become a great marketplace for everything. A further reason why it is necessary to stay flexible is that the competition in this business is getting bigger and bigger because many traditional companies see their opportunities in the internet and tend to sell their products as well online.
References
Wheelen, Thomas; Hunger, David (2005): Strategic Management and Business Policy. Tenth Edition, New York: Prentice Hall International, Inc.
Cf. Wheelen (2005), p.82.
Cf. Wheelen (2005), p.73.
Cf. Wheelen (2005), p.74.
Cf. Wheelen (2005), p.82.
Cf. Wheelen (2005), p.82.
Cf. Wheelen (2005). p. 82-86.
Cf. Wheelen (2005), p.110-111.
Cf. Wheelen (2005), p.111-114.
Cf. Wheelen (2005), p.106.
Cf. Wheelen (2005), p.164-165.
Cf. Wheelen (2005), p.145-149.
Cf. Wheelen (2005), p.189-1.198
Cf. Wheelen (2005), p.10-1 – 10-5.
Cf. Wheelen (2005), p.10-4 – 10-17.
Cf. Wheelen (2005), p.10-18 – 10-19.
