Amazon as the umbrella company operate 9 individual national websites (SBUs), all offering product categories tailored to that nation. There are over 30 different product categories within this set of websites, however not all are available on each one. As a result it’s difficult to place every SBU on the BCG matrix. Amazon.com is the only one to offer every product category. I will therefore for the purpose of this assignment place Amazon.com on the BCG matrix. In order to do this effectively I must consider the evidence:
- Amazon is a leading e-commerce retailer and has been growing year upon year with sales increasing from $3,993m in 2002 to $10,711m in 2006 (Amazon Annual Report, 2006). This suggests that more consumers are using Amazon to purchase their products
- In addition, net sales are predicted to grow between 21% and 28% in 2007 (Amazon Annual Report, 2006).
- It goes on to say that the operating income is expected to be between $355m and $505m, or 30% growth, compared with 2006.
- Amazon.com are also achieving a high market growth rate due to the increase in sales mentioned above as well the investment of funds in recent product line developments include apparel and accessories, beauty, grocery and baby ranges.
- Other indicators of market growth is their investment in new technologies such as a new ‘Amazon MP3’ store, the “Look Inside the Book” facility enabling customer to search the entire contents of books online, and a partnership with industry technology leaders Oracle and Internap, enabling them to gain expertise in database and web-delivery mechanisms.
From the evidence above it would suggest that Amazon.com currently has a high market share and is also has high market growth. They are market leaders and have had a steady increase in sales over a four year period with very good levels of profitability; they are also making sure they are operating in growing markets by developing their product range. As a result Amazon.com would fall in the ‘STAR’ quadrant of the BCG matrix. To maintain this position heavy investment will be required to ensure they are continually exploiting market growth. However once the market has saturated this SBU should become Amazon’s cash cow.
1.4) Product Life Cycle
The product life cycle is used to determine the current market position of the organisation and how its different components adapt and evolve to suit its current position. There are four stages to the product life cycle, introduction, growth, maturity and decline. The introductory period reflects the difficulty in introducing a new product. Rapid growth then occurs as many new investors are attracted leading to saturation of the product, whilst decline may occur as new substitute products appear (Doyle, 1994).
Amazon entered the market in 1994 and was a pioneer in e-commerce. As a new company in a very new market growth was initially slow. As use of the internet increased and technology improved the growth of the company picked up as it was able to expand its product and service offerings and is now at the growth stage of it’s life cycle.
Other evidence to support this is its expansion into new countries and markets. It has now expanded into six countries (UK, France, Germany, Canada, Japan, and China). These expansions have rapidly increased the company’s growth. However there are many more areas for potential growth in Europe, Australia, and South America. There is also room to diversify their product range further and as a result increase in the number of customers by attracting new markets.
If Amazon were to continue this growth and move towards maturity they make look to expand there product range further and continually search out new markets in order to postpone the decline stage of the product life cycle.
1.5) ADL Matrix
The ADL (Arthur D. Little) matrix helps to identify an organisation’s business strengths and the life cycle stage of the industry in which it operates. Combining these two dimensions on the matrix helps to identify the strategy that an organisation should be using.
To place Amazon on the matrix I will have to consider both dimensions of the matrix and the evidence available to me.
Amazon.com has expanded rapidly over the last six years, highlighted by its move into international markets (UK and Japan), the diversification of its product range (grocery and baby) and the introduction of new service technologies (‘look inside the book’). These have all been encapsulated by the companies increase in sales from $3,993m to $10,711m over the last four years (Amazon Annual Report 2006).
All this evidence suggests that Amazon.com is in a strong competitive position and in the growth stage of industry maturity. The markets they operate in are continuing to strengthen, sales are increasing and few direct competitors exist. They have also reaped the rewards diversifying into new markets and products. Their Market share is strong and stable, and is likely to remain like that regardless of what their competitors try to do.
Within this section of the matrix that Amazon fall into (highlighted above) it suggests that Amazon.com adopt a cost leadership strategy, which as I established via porter’s generic strategy they have done. It also recommends developing a differentiation strategy which again I showed via Porter’s five forces they have done.
In order for Amazon.com to become a dominant force within their industry they need to make an aggressive push for market share, which could be argued is the case currently, because of their investments to increase their growth and position. They also need to look for ways to improve their competitive advantage.
Currently Amazon’s main competitive threats come from companies that specialise in their highest product seller’s (e.g. books, music, DVDs) because they account for 65% of the companies sales (taken from a report overview form hoovers.com/ amazon.com).
2) Determining the future direction for Amazon
2.1 Ansoff’s Matrix
Ansoff’s Matrix (1968) is used to analyse an organisation and develop a strategic approach to growth, whilst helping to understand the risks that are associated with that strategy.
From what I have ascertained in the first section of this assignment Amazon are still very much in the growth stage of their life cycle and as a result have many strategic options available to them.
The most obvious way for Amazon to continue its current growth would be to maintain its market development strategy. This means taking existing products to new markets. Over the last few years they have already expanded their operations into 9 different countries, maintaining this type of growth could be a good option for Amazon. They have shown they have the capacity to open new ‘stores’ in new countries and cultures successfully, so this option would be relatively low risk if done correctly.
They are also using elements of market penetration as a current strategy for growth, taking existing products to their existing markets in the form of the new product lines (apparel and accessories, beauty, grocery etc). They are simply buying in from the wholesalers upon order placement, and selling on to the customer for a lower price, enabling them to maintain their cost leadership strategy and penetrating the market.
According to Porter’s generic strategy Amazon were also using elements of differentiation as a growth strategy. They are achieving this by creating new technological website features. Also taking into consideration the SWOT analysis there is an opportunity to take advantage of the rising number of people shopping online and adopting broadband internet.
Taking all these factors into consideration could lead them into a diversification strategy, taking new products to new markets. For example this could be achieved by the development of an Amazon Marketplace that enables third parties to sell their products via Amazon websites to the customer. This would allow customers to shop for products owned by third parties, whilst using Amazon features and technologies as their guides (adapted from Amazon Annual Report, 2006). It would create a new marketplace, where new products that would probably be non-existent on Amazon otherwise, could be sold. This kind marketplace would put them in direct competition with the intern retailer eBay.
Finally their technological partnerships with Oracle and Internap will enable them to enhance their database and web-delivery mechanisms and therefore enable them to gain a competitive advantage in terms of service delivery. Amazon could use these technological advances to develop a series of computer applications that could generate growth for the business, for example
- Amazon Simple Storage (providing a web services interface for storing and retrieving data from anywhere on the internet) Amazon Simple Queue Service (which offers a reliable, highly scalable mechanism for storing messages as they travel between computers)
- Amazon Mechanical Turk (which provides a web service for computers to integrate a network of humans directly into their processes)
- Amazon E-Commerce Service (which exposes the product data and e-commerce functionality to allow developers, web site owners and merchants to leverage the data and functionality that we use to power our own e-commerce businesses
(Adapted from Amazon Annual Report, 2006).
Applications such as the ones above will enable the Amazon to sell into new markets previously untouched, such as the e-business and search engine market, and other physical stores looking to enhance their online operations.
2.2 GE/Mckinsey Matrix
The idea of the GE/Mckinsey matrix is to evaluate businesses along two dimensions, which are industry attractiveness and industry strength. In essence this matrix is similar to the BCG Matrix. This is because it maps SBUs on a grid of the industry and, at the same time, marks their competitive position. The GE/McKinsey Matrix improves on the BCG approach in two ways. Firstly it utilizes more comprehensive axes and secondly it consists of nine-cells rather than four, allowing for greater precision.
Amazon owns a large market share in comparison to other e-commerce companies; it is one of the leading e-commerce retailers and has been growing year upon year with sales increasing from $3,993m in 2002 to $10,711m in 2006. As a result Amazon would be found high on the competitive strength axis. As a large global organisation other factors such as economies of scale, brand power, the low cost of operating online and ever improving process efficiency and technology also add to its strong position.
The market attractiveness for Amazon would be based on factors such as market size, market growth, industry profit margin and the amount of competition. Taking such factors into consideration again I would have to place Amazon high within this dimension of the matrix. The company has grown in terms of profitability alone and has obviously seen opportunities arise in different markets outside the USA, with further profitability available by the seizing these opportunities. The organisation will maintain a high unit strength and high market attractiveness by consolidating in the markets where it has already expanded whilst searching further opportunities for growth.
Amazon falls into The Dark Shaded Zone of the thrre cells in the upper left corner. This means it’s in a favourable position with relatively attractive growth opportunities. Its important that Amazon protect and maintain their position, whilst continuing to grow. The matrix suggests that the best way for Amazon to achieve this would be via investment into selective growth via market development.
Althougth this matrix is useful it does have its floors. For example the matrix doesn’t take into account interactions among SBUs or the core competencies that lead to value creation. For these and other reasons, some believe the matrix is better suited for providing an overview of the current market rather than serving as a resource allocation tool.
3) Objectives and Strategy Development
3.2 TOWS Matrix
The TOWS analysis enables an organization to understand the strategic choices that they face. It helps to formulate methods of make the most of their strengths, circumvent your weaknesses, capitalize on the opportunities and manage the threats.
3.3 Strategic Plan and Implementation
Utilizing the above matrices has enabled me to identify Amazon’s current position within the market, the strategic avenues available to them in order to grow and the ways to go about implementing these strategies in order to make them successful.
From looking at Porter’s generic strategy I can see that they currently adopt a ‘cost leadership’ strategy which has enabled to gain a high market share and put them in amongst the top internet retailer’s. This strategy has put them into a strong position and I feel it can be made stronger if they stick this strategy during this period of growth that they are currently in.
As there financial reports, product life cycle and BCG matrix indicate they are currently performing well and growing at a fast rate. In order to turn their strong position in the market into a dominant one attain their cost leadership strategy, whilst incorporating elements of differentiation, which as porter’s generic strategy shows they are currently doing. This should enable them to make an aggressive push for the leading market share and as a result improve their competitive advantage through things such as economies of scale.
Over the short term Amazon should look at using market penetration as a growth strategy. This means broadening their product range and offering their current customer base more options in terms of products. This should suit them well in the short term as in coincides with their cost leadership strategy. They are simply buying in from the wholesalers upon order placement, and selling on to the customer for a lower price. It’s relatively easy for them to implement and should be picked up by their current customer base relatively easily.
Over the medium term it’s probably best for them consider market development. It’s a method of growth that they have already utilized to great affect. This means offering existing products to new markets. In terms of Amazon this would mean opening new stores in new countries, therefore broadening their customer base. Again this is relatively simple for them set up and should be successful. However as I ascertained from GE/Mckinsey’s matrix, it’s important for them to build selectively. The y must ensure they understand and are confident in the new markets that they are entering.
Both the above strategies should satisfy Amazon’s growth over the next 6-18 months however these methods of growth may become saturated rather quickly, there’s a limit on how many new markets you can enter and how many product ranges you can offer before your brand becomes diluted and less distinguishable.
There is only so long Amazon will be able to protect it’s position at the top of the tree in internet retailing using these growth stratergies. As a result Amazon may have to consider as a long term plan diversification, to prevent them losing market share and entering the decline stage of their business life cycle. This means entering new markets with new products. As I mentioned earlier this could be achieved by the development of an Amazon Marketplace that enables third parties to sell their products via Amazon websites to the customer. This would allow customers to shop for products owned by third parties, whilst using Amazon features and technologies as their guides (adapted from Amazon Annual Report, 2006). It would create a new marketplace, where new products that would probably be non-existent on Amazon otherwise, could be sold. This kind marketplace would put them in direct competition with the intern retailer eBay.
Bibliography
Amazon Annual Report 2006
Doyle, P. (1994) Marketing Management & Strategy, Prentice Hall, Hertfordshire.
Vranesevic, T., Vignali, C. & Vrontis,D. (2006) Marketing and Retailing Strategy, Accent, Zagreb.
