In assessing the competitive position of a large online trader, we would use the five forces analysis of Michael E. Porter. The assessment would compare Amazon as an online bookstore against its online and conventional competitors.

Strategic Management

Strategic Analysis

External Analysis

Industry Analysis: 5 Forces Model

In assessing the competitive position of a large online trader, we would use the five forces analysis of Michael E. Porter. The assessment would compare Amazon as an online bookstore against its online and conventional competitors.

Potential Entrants

The online bookstore industry that Amazon has pioneered in was, at first, very hard to penetrate. There were different barriers such as distributing capabilities and the variety of the selection offered that are supposed to be hurdled. Although it is relatively easy to set up an e-Shop, however e-Shops such as Amazon now have very sophisticated websites and considerable investment in their supply chain infrastructure. Amazon successfully solved these tricky parameters as being the first one to get into the whole idea of online retail. With being the first, they had the luxury to set what were the norms for the industry. Factors that may lower these barrier tactics would be a wider selection and the ability to go to an actual bookstore to exchange or return books or other products. This network of "actual" retail spaces makes it easier for the consumer to return or exchange the products they were not satisfied with. They also have brand name recognition (Amazon is currently the best recognized brand on the net). Setting up a large, general purpose, online bookstore and getting customers to know about that bookstore and to use it is not going to be easy and is not going to be cheap. These handicaps of Amazon were the basis for the emergence of book retail giants Barnes & Noble and Borders in the online shopping industry. Most of the large, conventional book retailers have now set up online bookstores. They had the advantage that they could use their existing supply chain arrangements to feed the online bookstore. They have not achieved the brand name recognition of Amazon. It is perhaps doubtful that we will see many or any new entrants into this market, the costs of matching the infrastructure and brand recognition of Amazon are just too great. So the potential entrants were low.

Industry Competitors

The major competitors of Amazon are Barnes & Noble and Borders. Barnes & Noble is a retail giant offering books and CDs both in their outlets all over the country. It opened their online industry in 1997 and has become the fourth largest e-commerce sites today.

Focused largely on the sale of books, music, software, magazines, prints, posters, and related products, the company has capitalized on the recognized brand value of the Barnes & Noble name to become the second largest, and one of the fastest growing, online distributors of books. Their "advantage" to Amazon is the brand name and the availability of actual retail outlets in which consumers could go in to exchange or return products easily. They also have an established book selection based in their retail operations.

Borders were another multi-media retail store found in major cities around the country. Started out as a small bookshop in the college town of Ann Arbor, Michigan, it has since expanded into one of the finest bookstores. In 1992, Borders was bought by the Kmart group which further flourished the company into a Multi Media Giant with a wide selection of Audio, Video and Books found throughout the United States.

The online Bookstore industry have become a fierce business which involves discounts, varied selections and fast delivery in which all three companies are challenging each other. So we can conclude that industry competition was intense.

Bargaining Power of Buyers

The consumers of this industry can be found in every corner of the population. These are mostly people who have had some form of higher education and have access to the Internet and computers. The segment of online shoppers has increased dramatically in recent years due to the convenience of shopping in the comforts of the home and the accessibility of the Internet. These developments have made it easier for consumers to log on and buy on the Internet. Consumers also tend to compare prices among the retail leaders such that buyers are able to buy products with very big discounts compared to ones bought in "actual" retail outlets. The bargaining power of the consumer is based on the competitive strategies of each active firm in the industry. Thus, consumers can challenge one firm for charging more than the other one such that the firm will beat the price of the competing firm.

Bargaining Power of Suppliers

Amazon’s suppliers range from the publishing and media houses to electronics’ manufacturers. Amazon buys all their books, videos and audio CDs from the multimedia houses and publishing giants such as Time Warner, Doubleday etc. Amazon also has alliances with other bookstores to cover orders that they cannot serve. In the past, the book trade has, traditionally been a close sector with the retail price of books being set by the publishers and fairly standard trade discounts on that price being offered to both large and small retailers. Over recent years this position has been challenged by large retailers, e.g. supermarkets, seeking volume discounts on popular titles. This position has been pushed further by Amazon with aggressive demands for discounting from the publishers. . The suppliers are not in a strong position to resist. Some and the booksellers had simply stopped stocking their titles. Thus bargaining power of suppliers was low.

Threats of Substitutes

The substitutes for Amazon and other online bookstores are the "actual" book retailers and music stores such as Barnes & Nobles, Virgin Megastore, CD Warehouses, Sam Goody and other small mom-and-pop outlets. With the rise of online retail, there would be little impact from these substitutes. One impact would be some consumers who would like to hold or listen to their purchases prior to buying and those who are into the whole "shopping experience". Therefore threats of substitutes were quite low.

Conclusion

After analyzing online bookstore industry, we can conclude that the degree of competitive intensity was in the moderate level. The online bookstore industry would still be attractive and had an opportunity to make a profit since it is quite difficult for new competitors to enter this industry, low bargaining power of suppliers, and low substitute products. However, there was intense competition among existing competitors and high bargaining power of buyers. The company who want to be successful in this industry should have been widely recognized by potential customers, have user-friendly interface, and better customer services.

Customer Analysis

Segmentation

Customers in the online retail industry can be roughly segmented into 2 groups which are individual customers and business customers.

Individual customer:

We mostly called this group as “Internet users” who connected through internet for their specific purposes, for instance, searching information, sending and receiving e-mail, shopping, or playing online games etc. This group can be further divided into submarket by age range with the profile as follow:

Below 20 years

People in this group will be tweens and teenager. This group can be called “Cyber Punk” because they were interesting in the change of the society and world. They used internet mostly for communicating with others or playing online games. They were technology-friendly. But most of them hardly bought the product online because they have no credit card that mostly required for online payment.

Between 20-25 years

People in this group tend to be enthusiastic, like to travel and relax. They are always updating themselves about the environment changes. They like to try new things, fashionable products and services. Almost all of them will use internet for both in their studying or working. Some members in this group start using credit card.

Between 26-55 years

Members in this group are working. So they have higher purchasing power than other groups. They tend to collect money and seek security in their life. Most of their times will be working and less time for relaxing. So they tend to purchase products and services that provide more convenient to them. So online retail business had the promising opportunities to be used among the members in this group. Most of them have credit card which can be used to purchase product or service via internet.

Over 55 years

The last group will be people in high age range. They will begin to retire from their work and tend to be relaxing in their home more than going outside. Most of them spend their time for their relatives or go to church for studying religion. They do not pay attention to the environment change. Most of them will not be familiar with new technology and internet so they tend to buy the products in traditional retail stores.

Business Customers:

We could segment business customers market into 2 groups which were as the following;

Small Business Sellers

The members in this group are small and medium business who can post their product on Amazon’s website. The owners in this group have less investment and most of them start doing their business. They have no relationship as the large firm so they should find out the way to sell their product. Internet is the easiest way to sell their product which is lower cost than the other media.

Large Business Sellers

The companies in this group mostly had high investment in the online business. They entered to internet operation to be or to expand their channel of distribution and to promote their product to the customers. The pattern of online operation may be different among the companies depends mostly on their budget and nature of business which required different type of online operation.

Target customer

From customer segmentation, we recommend Amazon should target their customer both groups. For individual customer, Amazon should target their customer only in particular groups who have potential to buy products online. The most promising groups who had high income were the people in the age range of 20 – 55 years. A brief profile of Amazon’s target customers are as follow:

Age between 20 to 55
Have credit card
Have computer skill
Trendy, like to learn and try new things that can create convenience and experience

For business customers, Amazon should target to business sellers who their products and services had the potential to sell online. Actually, most companies tend to expand their online business in the future so Amazon should try to grasp this opportunity by offering services that meet those customers’ demand. Amazon should focus on providing its to their commerce partnership. Although, Amazon will receive a small fixed fee to cover oversight and setup expenses and a commission on items sold, they do not have to manage inventory and fulfillment of their partners’ products.

Customer Motivation

The important factors that motivate customers to buy product online and create the customer experience could be defined in three key dimensions which were the following,

Selection

On the website, customers could search and select more variety of the items in each product category by themselves. They could find thousands of the items with a few seconds. Moreover, they could sort, rank, or read the comment from other customers to make better purchasing decision. It was a key element that creates customer experience that differs from buying in brick-and-mortar retail stores. Thus, the company has to enhance selection process in the website and constantly expand the range of products sold on the site and improve the website to be users-friendly.

Price

Although the channel of buying will be different, customers were still seeking for a place that sells the same products at the lower prices. Thus, the company had to sell its products at the competitive prices to motivate customers to feel worth to buy the products online instead of traditional retail stores. Shipping costs that customers must be additional charge had been considered before setting final prices of each product items.

Convenience

Another key element that motivates customers to buy online was convenience. Online business’s website needs to be developed effectively and can provide customers with more convenient than buying from brick-and-mortar retail store. Customization or personalization can be used as the tools for meeting those customers’ needs because customers will be greeted and fill their personal information only one time. If they visited the website again, now the system will greet them with their name and remember all personal information that customers used to provide before. The only thing that the website wants their customers to do is clicking purchasing button.

Not only above three key elements which were the key success factors of online retail business, security and reliability were also the important factors that will prove the success of the online business. Customers did not want their information to be violated by the unrelated third-parties and they want to receive correctly and timely orders.

Customer Structure and Future Goals

Revenue Structure

As stated earlier, we knew that Amazon have 2 groups of customers which were individual customers and business customers. Therefore, Amazon’s revenue would come from these two groups in the form of retail sales and services fees respectively.

For retail sales revenues, at Quarter 2nd of 2002, Amazon’s retail sales were spread among 4 segments as follow,

U.S. Books, Music, Video
U.S. Electronics, Tools, Kitchen
International
Services

U.S. Books, Music, Video is the biggest segment which make 51% sales revenue, whereas, International creates 27% sales. U.S. Electronics, Tools and Kitchen is the third can be created 16% and 6% from service.

For the third-parties sellers or business customers, the fees that Amazon charge to their partnership remained confidential. But analysts estimated that Amazon’s fee structure ranged from a maximum of 15% of revenues (in partnerships where Amazon took inventory and completed fulfillment tasks) to a minimum of 5% of revenues (in partnerships where Amazon did not complete significant functions associated with inventory management and fulfillment) Amazon generated significant business across all of its third-party commerce models. They reported that third-party transactions accounted for 20% of its North American units sold in the second quarter of 2002.

Future Goals

According to its name “Amazon” which means the world’s largest river, Amazon’s founder want to build a place where people can come to find and discover anything they might want to buy online. We think its future goal is quite suitable for Amazon because it is realistic and challenge enough to motivate Amazon to put its best efforts to achieve that goal. But whether it will succeed or not depends very much on its strategies both in corporate, business, and functional level.

Competitors Analysis

Key Competitors

At the time of the launch of Amazon in 1995, ...

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Future Goals

Competitors Analysis

Key Competitors

At the time of the launch of Amazon in 1995, two large retail chains, Barnes & Noble and Borders, were competing to be the largest and most profitable bookstore in the country. Barnes & Noble operates Barnes & Noble stores as well as Bookstop, Bookstar, B.Dalton, Doubleday, and Scribner's Bookstores (, 1999). Borders operates Borders bookstores and Waldenbooks (, 1999). In the late 1990's both of these chains were earning net incomes in the tens of millions of dollars.

In the first six years of Amazon's operations, the company incurred annual net losses due to high operating expenses. Also, Barnes and Noble and Borders both launched web operations in 1997 that have continued to be unprofitable. The cost structures of online bookstores as compared to retail bookstores account for these differences in profitability.

Cost Structures

Cost Comparison

While the start-up costs for an online bookstore are low in comparison to retail stores, the operating expenses incurred from the continuing development of an online bookstore are high compared to the operating expenses for a retail store. This differing cost structure causes a difference in the margins and profits earned by these two types of stores.

Start-up Costs:

The start-up costs for an online bookstore like Amazon include the costs of basic computer equipment and software. Usually, the entrepreneur is skilled in website design and is willing to operate the store out of his/her private home, reducing labor and overhead costs. Because online stores do not require the maintenance of an inventory of books, there are no inventory carrying costs. The online bookselling industry is attractive to new entrants because of low start-up costs.

On the other hand, the costs of opening a retail bookstore can be very high. The entrepreneur must rent store space, install shelving, counters, and cash registers, employ a sales staff, and acquire an inventory of books. These high start-up costs will be covered by future revenues if the store is successful, as in the case of Barnes and Noble and Borders.

Operating Costs:

After the launch of Amazon.com, both Barnes & Noble and Borders launched their own web operations (bn.com and Borders.com, respectively). The increased competition forced online book prices to decrease (, 1998). As a result sales revenue and gross margins decreased. At the same time, these three online booksellers incurred high costs of maintaining viable web operations. These costs included marketing, technology improvements, and website development (, 1997). As the online bookselling sector became more competitive, the focus on developing a high-quality website became more important. Each of these three companies incurred expenses from marketing their web operations, taking advantage of new technologies, and developing their websites with the help of designers and business consultants. These companies also focused on customer service, and incurred the costs of developing a reliable distribution system to ensure order fulfillment (, 2001). Finally, the online stores faced opportunity costs and lost business due to technological failures like server downtime (, 1997). Because of these high operating costs and low gross margins, all three major online booksellers, Amazon.com, bn.com, and Borders.com, incurred net losses in their first few years of operations.

After the launch of online bookstores, retail stores continued to be profitable. Their operating costs are much lower in comparison to online bookstores. Retail stores incur marketing costs and supply chain costs in the form of inventory management costs. However, they do not incur the costs associated with the development and maintenance of a website. While some retail stores may employ business consultants, technology-driven companies are more likely to require this service. Low operating costs allowed the retail operations of both Barnes and Noble and Borders to be profitable at a time when their web operations were reporting losses.

Because of differing cost structures, both Barnes and Noble and Borders shed their web operations. Barnes & Nobles have jumped into online retail and have succeeded into diversifying into the new e-commerce industry. Barnes & Noble spun off “bn.com” in 1999 (, 2001). Borders sold its website to Amazon.com in 2001 (, 2001). These separations allow the retail stores to be judged on traditional measures of financial success, like net income, while the web operations are judged by new measures of financial success.

New Model for Financial Success

Because online booksellers are consistently unprofitable, other measures of success have been considered for these companies. First, net sales are used as a measure of financial success (, 2001). Because online booksellers price books below retail booksellers, their sales numbers are meaningful when compared with each other but not when compared with retail stores. Also, online bookstores measure success based on number of customers and number of books sold (, 1998). As these numbers increase, revenues increase, and online booksellers are more likely to make a profit.

The costs structure of online booksellers differs from that of retail booksellers, making a comparison of the two to determine financial success meaningless. As a result, a new model of financial success has developed for determining the success of online bookstores. This model includes an analysis of sales and sales growth rates and a comparison of the number of customers and number of books sold.

Driving Forces Analysis

Demographic Environment

Population:

In the mid of year 2002, total U.S. population was 287,973,924 people which grew around 1 percent from previous year. The male population was 141,533,390 people and the female population was 146,440,534 people.

Age distribution:

Age distribution structure of U.S. population was the following:

From above table, people in the age range of 25 to 44 years were the biggest group in U.S. which was 84,461,957 people or around 29 percent of the whole U.S. population. Next were the people in the age range of 45 to 64 years, 5 to 13 years, and 65 years and over, 18 to 24 years, fewer than 5 years, and 14 to 17 years respectively.

Income:

U.S. Per capita money income was declined by 1.8 percent, to $22,794, for the overall population between 2001 and 2002. This is the first annual decline in overall per capita income since 1991.

The median household money income in the United States was $42,409, representing a 1.1 percent real decline from its 2001 level of $42,900. The mainly declining was experienced by households in metropolitan areas. Both family and non-family households also experienced declines in money income. In contrast, both men and women who were full-time, year-round workers in 2002 experienced increases in their median earnings.

Socio-cultural Environment

World internet usage and population are growing:

Source: http://www.internetworldstats.com

Source: http://www.internet worldstats.com

Source: http://www.internetworldstats.com

Internet user’s history

US Internet Usage

Source: http://www.internetworldstats.com

From the information in Exhibit 11 in the case and the World Internet Usage and Population Statistics above, Internet usage in every country was increasing rapidly, especially in developing countries in Africa, Middle East, and Latin America/ Caribbean.

In America, internet users markets could be divided into 4 markets which were North America, Central America, South America, and the Caribbean. We could see that the North America is the zone that has highest internet users (68.3%) because of their higher education level than other zones. However, others zones also have high percentage growth, that could be potential market for e-retail in the future.

Top ten countries with highest number of internet users are United States, China, Japan, Germany, United Kingdom, South Korea, Italy, France, Canada, and Brazil. These countries could be divided into two types. First were the countries that had large number of population such as United State, China, and Brazil. Second were the countries that had high education level, such as Japan, United Kingdom, South Korea, etc. These two factors led to the high number of internet users in those countries. Moreover, the countries that had high number of internet users tended to be the potential of e-retail market.

Growth of internet users also increase steadily, as shown in “Internet User’s History”, from 16 million users in December 1995 to 812 million in October 2004.

From those factors, online retail business had a very high growth potential especially in the developing countries that have the opportunities to be improved in the education, household income, population, etc.

Economic Environment

Gross Domestic Product (GDP):

Gross Domestic Product or GDP of U.S. was 10,487 billions of current dollars which increased by 3.5 percent from the previous year.

Interest Rate:

U.S. Fed Funds rate or the interest rate at which banks lend to each other overnight as such a market interest rate in year 2002 was 1.25 percent which consecutively declined from over the past several years and was the lowest in the past 41 years.

Inflation Rate:

Inflation rate of U.S. which measured by the Consumer Price Index has remained below 5% annually since 1991. By which the Producer Price Index (PPI), which measures the change in the average selling prices of goods entering the market for the first time that is not sold directly to consumers and tends to be a leading indicator of inflation, was 3.8 percent.

Whereas the Consumer Price Index (CPI), commonly referred to as the inflation rate, is a measure of the average change in prices paid by consumers for a fixed market basket of goods and services, was 2.4 percent.

Although both price index had increased from the previous year but it had remained low when compared with over the past 20 years.

Unemployment Rate:

The U.S. Unemployment Rate was around 6 percent which was the highest since April 1994.

Foreign exchange:

U.S. Dollar was depreciated when compared with other major currencies in the world especially in Euro Dollar. The economic situation was not recovered since the world economic crisis in 1997.

In conclusion, economic environment would have little effects on Amazon business. However, Amazon should consider some factors that affect customers’ income and wealth such as interest rate and income per capita since it will more or less affect purchasing power of its customers. Furthermore, Amazon should keep its eyes on foreign exchange fluctuation since Amazon had the international operation that may use different currencies.

Political & Legal

There are many related topics about internet law which were as follow:

Internet commerce
Intellectual property
Privacy
Freedom of speech
Jurisdiction/ Procedure
Securities
Taxation
Criminal liability
Encryption/ Cryptography

The topics that most concern with the e-retail business is the “Internet commerce” with had related law inside as follow:

Electronic Signatures and Records: The New U.S. Perspective, by Raymond T. Nimmer, Leonard H. Childs Professor of Law, University of Houston
Checklist for Legally Secure Website by Walter Effross, Associate Professor, Washington College of law, American University
The Need for a More Objective Look at the Myths of the Proposed Uniform Computer Information Transactions Act by Donald A. Cohen, E.I. Du Pont de Nemours Co. Greenville, Delaware and Mary Jo Howard Dively, Klett, Lieber, Rooney and Scherling
Online Lawyering: Cyberlawyers Must Chart Uncertain Course in World of Online Advice by Joan C. Rogers, The Bureau of National Affairs, Washington, D.C.

Amazon had to conform to those laws by doing its business within the boundary because it directly affected Amazon’s operation.

Internal Analysis

Value Chain Analysis

Primary Value Chain Activities

Inbound Logistics

Amazon had various types of services. It sold it own products and deliver them to customer but at the same time, it also acted as an intermediary between business entities and customers or between customers and customers. Inbound logistic of Amazon was used for the first type of service, sold it own products to customer directly. It began with books then extended the range of product to others such as CD and DVD. The inbound logistic process was a great advantage of online-shops like Amazon. It could provide a great deal of selections but no need to stock a lot of goods like the traditional retail stores have to do. Only best selling products were stocked due to demands in each period which can be forecasted. For example, Amazon sourced the best-selling 35% of its titles, which accounted for 60% of its order, from a single large distributor. It sourced the remaining 40% of orders from other distributors and publishers. These are the benefits of Amazon which the traditional stores do not have. Furthermore, Amazon could limit working capital and warehousing investment by this process too.

Operations

The investment of Amazon in operation consisted of $800 million in technology and security system. Feelings of safety and convenience of customers became trust and loyalty in the company. Amazon also invested in warehouse, distribution center and customer service center to deliver and provide satisfaction to its customers. Moreover, it expanded its business to auction and zShop which gave a chance to the third-party sellers in online sales.

However, a big restructuring occurred in 2001 to implement the Marketplace Model and to follow the Single Store strategy. It cost $150 million and 15% of employees were unemployed. One major distribution center and a customer service center were closed. These changes were believed to reduce complexity and improve efficiency of operation. Before these changes, general managers for each store had been responsible only for Amazon’s traditional retail commerce; separate management teams had run the auctions, zShop, and other third-party initiative. Later, general managers for each store would be accountable for store-specific income statement that reflected both commerce related to Amazon’s operations and commerce related to activities on Amazon’s platform of third-party sellers

Outbound Logistics

Although online business had more advantage than traditional retail store about real estate locations but it had to have some centralized distribution centers that pick and pack millions of unique product combinations and ship them directly to millions of customers’ homes. Technology, process and competencies needed to run this operation differ fundamentally from traditional distribution functions.

Estimated shipping dates of Amazon were based on several factors, including destination address, how quick it could obtain and assemble items for shipment, and whether the requested of customers that it minimized the number of shipment or ship items as they became available.

Amazon calculated delivery estimates time by taking its estimated shipping dates and adding the time it took a package to travel from its facilities to customers’ destination address.

The ship rates were separated by domestic shipping rates and international shipping rates. Domestic shipping rates had 3 time rates: standard shipping (3-5 business days), two-days shipping, and one-day shipping. International shipping rates were divided by continents and had 3 time rates: standard international shipping (15-28 business days), expedited international shipping (7-14 business days), and priority international courier (3-7 business days). The expenses for shipping depended on distance and time.

Amazon’s deliveries were supported by many companies such as UPS, U.S. Postal service, DHL Worldwide Express, Airborne Express, FedEx, and Menlo Worldwide.

Marketing and Sales

Through 1999, as the Internet continued to gather momentum, Amazon increased its commitments to new categories. As Amazon expanded, the private and public equity markets funded Internet-related companies to an unprecedented degree. After that, Amazon launched toys, electronic products, tools, software, lawn and patio and kitchen product, cell phones, and wireless services. In addition, it expanded overseas, adding dedicated sites for the U.K., Germany, Japan, and others.

In mid-2002, Amazon’s revenue comprised of 4 categories which are 51% from U.S. books, music, video; 16% from U.S. electronics, tools, kitchen; 27% from international; and 6% from service.

Not only of these items, Amazon considered more products such as apparel, which market segment at $203 billion per year (10 times of books market) and Amazon’s only apparel offering was a small selection of goods offered by zShop merchants. All of these were done to serve Bezos’s word, “We’re building a place where people can come to find and discover anything they might want to buy online”.

Service

Most of Amazon’s revenue came from merchandise so Amazon had to invest much money to improve service for its customers’ convenience. Amazon paid a lot of money to build out and integrate the technology that ran its Website, customer service unit, payment processing systems, and warehouse operations. For example, Amazon had made a number of innovations in customer-facing technology such as one-click buying, personalization and customization for customer. Additionally, Amazon’s technology stored customer’s address, credit information, gift recipients, and payment preferences.

Furthermore, Amazon’s service supported to the third-party sellers, which were small merchants, large corporations, and its partnership.

For the small merchants or individuals, Amazon had zShop and Auctions to introduce their products in single detail page. Customers could find items by using the search box in the upper left corner of Auctions and zShop pages is simple—just enter a key word or two and they were on their ways. When customers bought from Amazon Marketplace, Auction, and zShop sellers, Amazon want customers to be safe. The condition of item customers bought and its timely delivery were guaranteed under the Amazon.com A-to-z Guarantee.

For large business sellers, most of Amazon’s commerce partnerships with large companies fell into 4 categories i.e. [email protected], merchants.com, syndicated stores, and marketing deals. Under [email protected], before Amazon set up their websites, its partners could sell their products on Amazon’s Website while still performing many of the commerce functions themselves. For merchants.com, in contrast to the [email protected] program, the goods were not merchandised on Amazon’s site but appeared on the partner’s own, separate site. Amazon would service this program by used its infrastructure and technology such as distribution centers and fulfillment functions. About syndicated store, like it merchants.com program, but this program charged Amazon with responsibility for all product development and operational tasks in support of the Website, including buying, stocking, pricing, shipping, and servicing product. Finally, marketing deal, Amazon promoted its partners’ products or services on its Website and, in some cases, allowed its customers to click over to its partners’ Websites.

Support Activities

Procurement

Book, music, CDs and DVDs were the product categories that Amazon made full procurement activities. Amazon sourced more than half of its books from a few distributors to ensure the inventory level and rely on each other. While other product categories, Amazon will not store its inventory by itself but it will order from the suppliers when customers place their order with Amazon.

Technology Development

Amazon was quoted as the most sophisticated e-commerce operations in the world. It invested around $800 million in its operational systems which were website running, customer services and payment processing. Its technology innovations also included customer-facing technologies e.g. one-click buying, greeting pages customized by each customer, recommendation based on personalization and prior purchases as well as favorite prediction. One of the most important technologies of Amazon was security that was very necessary for online business because customers had to be protected from fraud and privacy. Thus Amazon’s customers could be confident for the safety and reliability of Amazon’s system which would lead customers to have loyalty and lock-up customers with Amazon’s website.

Human Resource Management

Amazon hired a lot of employees when compared with other online retail business like eBay since it had different nature of business operation. Amazon focused on selling the products by themselves whereas eBay emphasize on the auction business. Thus, most of Amazon’s employees worked in the distribution center and customer service centers. Amazon’s employees were increasing about 60 times in 5 years by which in 1996 Amazon had 151 employees and increasing to 9,000 employees in 2000. The huge increasing number of employees was in order to support the business expansion both in the distribution centers and customer service centers around the world. However, Amazon had to lay off 1,300 employees and closed down its distribution center and a customer service center in its restructuring program in early 2001. Moreover, Amazon’s productivity was continuously improved. Revenue per employee had consecutively increased from 1996 to 2001. It was in the same level as other online business competitors.

Firm infrastructure

Amazon spent much of its money to invest in the company’s infrastructure that allowed the company to operate a fully e-commerce operation including payment processing systems and customer service operation. Amazon had also built an enormous database that supported its information-driven function, such as customer service and website service. So Amazon had very high standard, reliability, and scalability. From the above factors, it led Amazon to be the most experience e-commerce operation in the world.

Financial Analysis

From financial statement, we could calculate financial ratio of Amazon in the year 2001 – 2003 as in the above table. We could see that Amazon had problems with its profit and debt ratio. Amazon had debt more than equity since it had negative retain earnings as the information in company’s financial statements in appendix. If Amazon did not improve its operation, it will have limit abilities to survive and expand its business in the future.

SWOT Analysis

Strengths

Pioneered on-line bookstores

Although Amazon may not been the first online book sellers but Amazon was the first significant company to make an entrance into the online book market. So it acquired many advantages over other followers, for example, steep learning curve, brand recognition and loyalty among internet users. Nevertheless, by being only the first mover did not guarantee success to the business but it can be competitive advantage if it followed by effective strategy and subsequent development.

Unlimited Shelf Space

Unlike traditional bookstores, music warehouses, or other retail shop, Amazon allowed internet users to shop around much more variety of items in each product category. It had unlimited shelf space to display their product items. Moreover, it could organize or customize their shelf display to serve different customers’ needs. It would allow customers to search or sort their interested items by themselves so they had a higher potential to buy the product from Amazon.

Strong Brand Recognition

After Amazon opened for business in July of 1995 and had nearly 340,000 unique customers and daily site visits of 80,000 in 1997. Now Amazon was ranked as the 37th most visited website and the number one in shopping/retailers website category. Most internet users would recognize and familiar with the name of Amazon, so it had a greater chance to be visited by potential customers than other competitors’ website.

Large Customer Database

By shopping via website, internet users required to provide their personal information such as name, address, and email etc., so Amazon could utilize these huge customer database in many ways, for example, sending promotion message, informing about new product offering, or providing more effective customer relationship management (CRM) etc. In addition, Amazon could trace their customers’ visits through its website. It could know which pages customers was most visits, or which product category they were interesting, so Amazon could individually customize their web pages to serve each customers. It would be what we called “Individual or One-to-One Marketing” that would provide more satisfaction to the customers.

Presence in Global Market

The greatest benefit of internet was its accessibility from everywhere in the world that had interne connection, therefore Amazon could present their products in the global market which other traditional retail shop could not do so. Thus, Amazon could easily expand its operation and customer base to the foreign market without major investment.

User-friendly Website

Amazon had been designed to friendly interface with the internet users. Website visitors could be easily search among product category or specify particular items that they were interesting. The necessary product information would be shown on the only one web page, so the customers could be better made a purchase decision. In addition, customers could be easily followed the ordering process until the payment. This would encourage customers to do more online shopping through Amazon.

Steep Learning Curve

Since Amazon was an early player in the online business, it would better know and understand what customers need and how to effectively improve its operation. Thus, the company’s learning curve will be steeper than other competitors. We could see that now Amazon had the most advance technology and company infrastructure in this business area when compared other competitors.

Shorten Operating Cycle

From the data provided in exhibit 2b, Amazon had shorter operating cycle than typical book retailers. It would receive payment from the customers before paying their account payable to their suppliers, unlike typical retailers who had to pay their account before receiving money from their customers. The shorter the cycle provided the greater the number of times the cycle can be repeated in a given time period and the lesser the working capital needed to run the business.

Weaknesses

High Cost of Sales and Operating Cost

From the information in financial statements, Amazon had consecutively loss since its opening in 1995. The major parts of their costs were costs of sales and operating costs. Amazon’s cost of sales was accounted for 70 – 80 percent of total revenue and operating costs were accounted for 30 – 40 percent of total revenue, so it left net operating losses into the company’s income statement every year from its opening until year 2001. So it would limit Amazon’s choice of financing and ability to expand the business.

No Touching Experience

Although Amazon would provide distinct searching and shopping experience to internet users, it prohibited the touching experience. Unlike retail shop, Amazon’s customers would have no physical touch with the products so they could not trial or test them before making purchase decision. Thus, it may be competitive disadvantage of Amazon in particular product categories.

No Personal Contact with Customers

Like the touching experience, Amazon would lose the opportunity to have personal contact with their customers. Even if Amazon tried to overcome this barrier by opening many customer service centers in different location, its operating costs was increasing. So it decided to close down some service centers to reduce operating costs. In addition, Amazon could not physically trace customer behavior apart from website visiting history, which had to implicitly translate the meaning that may or may not be accuracy. Thus, Amazon may not know how their customers really feel after visiting the website or purchasing the products. Although Amazon tried to get customer feedback from customer rating option but not all customers would rate the feedback or the outcomes may not been reliable as expect.

Opportunities

Increasing number of Internet Users

The number of internet users was annually increasing. People tended to use more internet connection since they received several benefits from connecting through internet especially saving their time and money. Thus, internet became popular among users around the world. So the potential customers of e-shopping business firms were increasing.

Changing Customers Perception and Behavior

In the past, customers’ perception toward e-shopping may not be popular as present day because they felt unreliability toward quality of the goods, electronic payment, and system. Therefore, internet users tended not to purchase the products from the website. Nevertheless, after internet users were more educated and e-commerce became more common among surfers, e-business had been rapidly expanding. The companies that do e-business had a chance to sell more products and increase their revenue.

International market expansion

Although Amazon may be popular in the United States, the proportion of their revenue from international market was still low. From the information of internet users and shopping users provided in this case, there were a plenty of rooms for e-shopping business to expand to international market especially in China, Netherlands, Sweden, or Hong Kong etc. If the company could localize their website and system to meet the needs of each market, it had a chance to increase their sales revenue in particular market.

Technology Advancement

Technology was one of the key success factors for electronic business. Technology progressiveness would provide e-business players more ability to satisfy customers’ needs that otherwise never be possible. Amazon was one of leading company that made a major investment in technology development, so it had a chance to better serve their customers in the future and generate higher sales or reduce operating costs from technology advancement. However, technology advancement was dynamic, so the company involved in that environment had to be flexible enough to cope with those changes.

Threats

Increasing Competition

As e-shopping became popular, there were attracted many potential entrants into this business. New e-shopping players included not only the really new competitors but also existing website operator in other areas. Therefore, the level of competition would be stronger and the company’s customers may be lured to other competitors.

Strategic Formulation

Direction Setting

Vision Statement

Jeff Bezos, the founder, chairman, and CEO of Amazon, envisioned Amazon as “To be the place where people can come to find and discover anything they might want to buy online”.

Therefore, throughout its eight-year history, Amazon was constantly expanding the range of products sold on their website to follow its founder’s vision. But Amazon did not be the first website that customers would think about when they want to buy online. So we recommended Amazon to make a little adjustment on its current vision as “To be the first place in customers’ mind where they can come to find and discover anything they might want to buy online”

Mission Statement

Amazon did not state it own mission so we recommend that Amazon should set its mission as “Being the place that offer customers with the most convenient, reliable, and various products with the service-minded website”

Corporate Strategy

Concentration Growth Strategy

After analyzing both external and internal environment of Amazon, we think that Amazon should use “Concentrate Growth Strategy” for its business. The details of this strategy can be explained by using strategy table below.

Strategy Table

From the strategy table above, Amazon should pursue 2 strategies which are the “Market Development” and “Product Development” Strategy.

Market Development

Market development strategy will lead Amazon expand to the new market by focusing on its current product. By growing with this strategy, Amazon should develop the alternative version by localizing the content of Amazon to suit with each country that it wants to enter. Those countries should have a high number of internet users and shoppers.

From the information in environmental analysis section, Amazon may have an alternative to enter its operation in Netherlands, China or South Korea because it had highly rate in the number of internet users and shoppers. However, Amazon should decide which country had the most potential to generate sales that worth with its investment. After selecting the particular country, Amazon should develop the content in its website with the local language that will help to attract and facilitate internet users of those countries to enter the website and buy the products from Amazon. In addition to modifying its website, Amazon had to decide whether to establish distribution center in each country that it will expand or not. We recommend Amazon to establish its distribution center because it will help Amazon to better serve customers. More details of distribution center will be explained in the operation section of strategic formulation below.

Product Development

Product development strategy will lead Amazon to expand its product lines into the new category within the current market. At present, Amazon had sell its products that could be categorized into 5 categories which were,

Books, Music, DVD
Electronics and Office
Professional Supplies
Home and Garden
Kids and Baby

Amazon should evaluate which product categories can be sold online and generate return worth for its investment. From the information providing in the case, Amazon should add the new product category which had high retail spending but low percentage of online sales when compared with all retail sales.

From Exhibit 3 Forecast: U.S. Online Retail Spending by Category ($ millions), there were 3 promising product categories which are general apparel, office supplies, and tools and hardware.

Amazon has already added office supplies and tools and hardware in the product line so general apparel is the recommended one because it had potential to generate higher revenue and gross profit margin than office supplies.

Pros and Cons of the Concentration Growth Strategy

Pros:

Utilize Resources and Business Know-how

By focusing on current business, Amazon could utilize its resource and technology know-how in its online business to easily expand to the new markets. Amazon was the early player of the online selling so it could serve customers with the more advance technology than other competitors.

Low operational risk

Concentration growth strategy would help Amazon grew with the lower operation risk than other growth strategies. Since Amazon’s management and employees would be expertise in their work and they knew the business environment very well, so they could effectively perform their work within the new market or with the new product category.

Knowing the customer’s needs

Amazon had operated in the online business almost 10 years, it would know what customers need and expect from the online business. For example, Amazon could know that besides price and convenience, a wide range of selection was also a key dimension that defines the customer experience. So Amazon keep extending their product categories offered on its website that customer might want to buy online.

Low investment risk

As we had seen in the financial statement, Amazon had consecutively loss on its net cash provided by operating activities because its costs of doing business were very high. In addition Amazon’s investment activities were also loss. Although Amazon could generate more cash by issuing common stock, exercising of stock options, and borrowing long-term debt, there was limited amount. Thus by expanding in its current business, Amazon would require lower investment than other strategies. If its new business wasn’t success, it would lose limited amount of its investment.

Cons:

High Financial Risk

Due to using concentration strategy, Amazon would focus only on the current business. If there were the problems in the online retail business, for example, the number of internet shopper decrease or the competition is more intensified; Amazon’s revenue and profit will be affected a lot since it focused too much on only one business area.

Business Strategy

According to Concentration Strategy, Amazon would target both groups of its customers which were individual customers and business customers. For individual customers, Amazon should target on the white collar at the age range of 20-55 years, having credit card and computer skill, whereas, the company’s commerce partnership should be .

Under the terms of these arrangements, partners could sell their products on Amazon’s website while still performing many of the commerce functions themselves. In these deals, merchants retained ownership and possession of inventory and set prices on their inventory. Amazon’s benefited from improving its selection and customer experience. Moreover, the company received a small fixed fee to cover oversight and setup expenses and a commission on items sold.

Amazon should use the Concentration Strategy. So the company should seek for the way to growth with this strategy. Details of Business strategy is explained as the table below,

Competitive Advantage

Amazon should use 2 ways to overcome its goals which are “Differentiation Strategy” and “Focused Differentiation Strategy” to support their growth strategy. There are a lot of competitors in internet business. So Amazon has to continuously develop themselves from those competitors by creating the friendly interface.

Differentiation Strategy

Traditionally, customers have to buy the product at the store such as consumer product at discount store, convenience store, or department store, book or magazine from bookstore, general apparel on shopping mall. But Amazon creates the new channel to buy goods from the internet which are more convenience than the old process. So Amazon establishes the process differentiation that can help customer buy products easier. In addition to the process differentiation, Amazon should emphasis on research and development (R&D) to establish the most updated personalization and customization on its website.

Focused Differentiation Strategy

There are only 62% of U.S. populations and 21% of Non-U.S. populations using internet, whereas, 32% of U.S. populations and 10% of Non-U.S. populations shop online. So the number of internet users is too small comparing to the total populations. So Amazon targets on niche market. In addition to emphasizing on niche market, the company also differentiates itself by using know-how technology.

Functional Strategy

Marketing Strategy

Product

As Amazon’s new vision “To be the first place in customers’ mind where they can come to find and discover anything they might want to buy online”, Amazon should add more new product category to increase sales, customers’ satisfaction, loyalty, and persuade new customers to buy online. To select new product category, Amazon had to analyze the market potential and size of each product category by using the data analysis of Marketing Research and Development. For example, in the exhibit 3 from the case, the product categories that had high potential for online business are apparel, office supplies, tools and hardware. But before expanding into those particular categories, Amazon had to evaluate its ability to source from supplier, distribute, and fulfill its customers’ order of the new product categories.

Services

Apart from selling product to individual customers, Amazon should pay more attention to sell its services to the business customers. At present, many businesses are moving forward to sell their product online, so they need the effective website management that can handle their online customers’ orders. Thus it was an opportunity for Amazon to offer those business customers with its services such as website construction, operation, maintenance etc. Amazon will get consistent revenue from those services because most of the services will be paid as regular monthly or yearly fees that are the smooth cash flows.

Price

As earlier stated, Amazon’s customers could be roughly divided into 2 groups, individual customers and business customers. For individual customers, Amazon should set the competitive price on each product item. Its price may not be lowest because customers had already compensated for transportation costs of buying from retail shop but the final price of each item should be set by considering the additional shipping costs that customers must be charged otherwise its price will not be competitive with the brick-and-mortar retail business.

For business customers who buy the services, Amazon should try to set the lower price and offer variety of services to attract business customers to use Amazon’s services. Because after they became Amazon’s customers, all of their website operation will be locked up with Amazon and they will hardly change to other competitors. However, Amazon has to keep on introducing new service by adding more value to their services and trying to keep those customers with Amazon. In addition, Amazon has to keep on improving customer service to increase satisfaction and loyalty among those business customers.

Place

Amazon should keep on selling its product online as its main distribution channel because it was its core business and it had capabilities in that area. However, Amazon should expand into the foreign market as explained in the previous section. Since from the external analysis, the world internet usage and population are growing steadily. Amazon should take this opportunity by expanding it operation into other countries. The countries those we recommended Amazon to expand are Netherlands, China, Hong Kong, Sweden, and South Korea because they have high number of internet users and internet penetration rate.

For providing its services, Amazon should use its well-trained sales representatives to offer its services to the business customers because services were needed to be explaining and demonstrating in details to the customers. Sales representatives need to be well-trained to present to each customer and clearly answer customers’ questions. They need to know the nature of customers’ business very well.

Promotion

Amazon should launch promotional activities to stimulate existing customers to buy more products and attract new customers to begin its online purchasing from Amazon website. The promotion may be special price discount for the members who buy a lot of products with in a specified period of time. Or, Amazon may develop games online on its website to motivate internet users and potential customers to visit its website. If they could win the games, they will be offered with the special discount on the specified product items that they were interesting. Furthermore, Amazon should regularly inform its customers about the new products and special promotion in its website but it should ask for approval from each customer whether they agreed to receive weekly email from Amazon. It will help to protect bad image from customers who may think email from Amazon as spam or junk mail.

Operational Strategy

From the information provided by the case, we could see although Amazon’s revenue was increasing consecutively, but it faced with loss from operation almost every year. The major reason behind these losses was the high operating costs both in the parts of costs of revenue and selling & administrative costs. So Amazon left up each year with the negative cash flow from operation and had to financing to expand its business. Thus Amazon should improve its operational processes to do its business more effective and efficiency to reduce those costs and generate positive profit. We recommend that Amazon should improve its operation in these following ways.

Centralized Distribution Centers

Amazon used to open a lot of distribution centers to operate and handle its customers’ orders. The investment in each distribution center was very high both the initial investment and later depreciation expenses. Thus we recommend Amazon to centralize its distribution center especially in the United States to be like what we have seen in many retail businesses such as Tesco and Wal-Mart. By centralizing distribution center, Amazon would reduce its operating costs.

Restructuring Working Processes

Another major cost of Amazon was employee compensation. Since Amazon hired a lot of employees which was much higher than other online retail business competitors but the productivity was at the same level. Therefore, we recommend Amazon to change its working processes by automating its operation. The example of automatic machine may be substitute the sorting, packing, and labeling processes that used to be performed by employees. It will help Amazon to use lesser employees and save more money.

Localizing Web Content

Since we recommend Amazon to expand more into the international markets, Amazon should localize its web content into the local language such as Japanese and Chinese to motivate and attract more potential customers who don’t like to use only English to visit and buy products from the website. Localizing web content will also be the benefit to Amazon’s image because it showed to the internet users in those countries that Amazon saw their importance and paid respect to their local language.

Investing in Research & Development

Technology are changing very rapidly as well as consumer behavior, so Amazon should keep on putting its efforts in research and development (R&D) to improve its working processes and provide customers with higher satisfaction. Customers always need more user-friendly website and better services so Amazon must offer them with variety of product items and easy-to-use website. By collecting customers’ information in the database, Amazon could utilize this available information to come up with the products and services that meet customers’ needs and provide higher customer satisfaction and loyalty.

Financial Strategy

Amazon had the problems with its financial position since its beginning. It had the problem in its cost structure comparing with eBay (Exhibit 7b).

Although the online retail business generate a lot of revenues, but it left with negative profit. Amazon had very high costs of revenue and operating costs. That’s why, Amazon should expand product category by trying to not create the inventory in the warehouses. It will help Amazon to reduce its operating cost and costs revenue. In addition to reduce its costs, Amazon should improve its working processes by using more advance technology such as automated machine etc. Furthermore, Amazon may reduce the operating costs by lying off its employees and centralizing its distribution centers that help Amazon to earn the money to pay its long-term liabilities and cut down its interest expenses.

Lastly, Amazon should compensate its financial risk by increasing its revenue. It can achieve by expanding into new product categories to achieve economies of scale and emphasizing more on providing its services to business customers that can generate regular revenues.

Human Resource Strategy

Amazon tried to cut its costs by lying off its employees that affected employee satisfaction. So Amazon must do something to maintain employees’ morale. As a result we recommend Amazon to reorganize its human resources department to include the following functions and its responsibilities.

Manpower Planning

Planning for the optimal numbers of employees that appropriated with the process requirement and costs.

Recruitment and Selection

Defining the clear job description and qualification of employees and having the well-defined recruitment and selection processes.

Training and Development

Setting training program, process and career path for each position.
Emphasizing on training the employees who can support IT technology to make reliability and security to customers.
Developing operating process to improve employees’ productivity.

Performance Appraisal Evaluation

Setting clear, reliable and accurate evaluation.
Establishing incentive program, Amazon can tied the incentive program with Balanced Scorecard.
Using Employee Stock Options Program (ESOP). Besides incentive program, Amazon can use ESOP for increasing sense of ownership and encourage partners.

Strategy Control and Evaluation

In control and measuring the performance of Amazon, it can use “Balanced Scorecard”, which was a new approach to strategic management that developed in the early 1990's by Drs. Robert Kaplan (Harvard Business School) and David Norton. They named this system the “balanced scorecard.” Recognizing some of the weaknesses and vagueness of previous management approaches, the balanced scorecard approach provides a clear prescription as to what companies should measure in order to 'balance' the financial perspective.

The balanced scorecard is a management system (not only a measurement system) that enables organizations to clarify their vision and strategy and translate them into action. It provides feedback around both the internal business processes and external outcomes in order to continuously improve strategic performance and results. When fully deployed, the balanced scorecard transforms strategic planning from an academic exercise into the nerve center of an enterprise.

The balanced scorecard suggests that the company should view the organization from four perspectives, and to develop metrics, collect data and analyze it relative to each of these perspectives; Finance, Customer, Internal Process, and Learning & Growth.

Key Performance Indicators (KPIs)