How Amazon Altered Its Strategic Direction To Enable Growth And Expansion
Title: How Amazon altered its strategic direction to enable growth and expansion
In 1994 after the Internet´s major growth, Jeff Bezos, the CEO of Amazon, wanted to build a “everything store” online. To position his service in people’s mind, he had to focus on a niche. He made a list of several possible categories and one interesting option popped out – the books. It was a $10 billion industry in the United States in 1994 and customers generally had “Fear of Unknown”, and since books were pure commodities and were identical whether you bought them online or in a store, this fear would be non-existent. As Bezos begun to sell the books over his platform, he delivered to all 50 states in the U.S. and over 45 countries, which brought him a weekly income of 20,000 US-Dollar. Whereas, today Amazon is one of the biggest companies of the world, with 566.000 employees and an operating income of $4.1 billion.
As books started selling, Amazon wanted to establish the difference in a consumer’s mind and build sustainable competitive advantage – providing greater customer value and low prices. After several customized activities, this became unique and a stepping stone for sustainable competitive advantages for Amazon.
Since online shopping was new to many and customers had a fear of “unknown quality”, Amazon were one of the first ones to introduce a “30-day return policy”, as well as they put users reviews into use, which was a part of reducing customers fear of failure. Later, in 1996, Bezos introduced customer personalization suggestions based on their taste. Now Amazon uses algorithms that understands the user´s needs, desires, wants and customizes the shopping experience for every individual. A survey notated that more than one-fourth of amazon’s sales came from Amazon’s personal recommendations.
Amazon has designed its activities in a way that they complement each other and reinforce one another and thus building the competitive advantage. Fit among activities reduces cost and increases differentiation. In 1998, Jeff became aware of Amazon’s potential to expand further and decided that Music and DVDs was his next target. Amazon could use the same value network profitably to meet needs of the customers in those new categories. The expansion went well, and later started to sell Toys and Electronics as well. Amazon slowly moved towards “The Real Everything Store”.
During the first half of the 2000s, Amazon´s size grew rapidly, and the warehousing and distribution structure became more complex. Bezos then faced the question if Amazon should be in the business of storing and distributing its products directly from the manufacturers and distributors. After a series of analyses, Bezos realized that quality of service is largely dependent on efficient distribution, and this was hard to control when you outsource. Because of this, Amazon needed to create on its own and it would be a major competitive advantage.
Amazon executives made it possible for small retailers and individuals to sell their products to Amazon´s customers. If a seller gains the order, Amazon would get the commission from the sales. As an “Professional” you pay $39.99 per month for the service, plus you have fees for each sold item, which depends on what you sell. Whereas as “Individual”, you do not have to pay a monthly fee, but instead you pay $0.99 per sold item, plus referral fees and variable closing fees.
It was clear to Bezos that one of the biggest hurdles for online shopping was the shipping cost, because customers never paid for these charges while shopping from an offline retail store. In the early 2000s, Amazon announced free shipping for orders of a hundred dollars, which was a great success, and then later brought down the free shipping to items costing more than $25. Amazon Prime was a service that included unlimited free express shipping at the price of $79 for a year. This led to the sales exploding and Amazon´s prime members came back to shop more through Amazon. Amazon made almost double the money from a prime member than the non-member. Now, in addition to express shipping, Amazon Prime provides services such as Prime Movies and Prime Music for members.
When it comes to competitors, Amazon possesses substantial resources to fight back if a competitor enters their market. Amazon will slash prices or make some other aggressive plan as it is committed to retaining the market share. When Apple began to disrupt Amazon´s music business, Bezos was taken back, and there was little he could do. He didn’t want to repeat the same mistake again and wanted Amazon from now on to disrupt their own market. Instead of competitors threatening the market, they faced the threats themselves. He chose “Books” as their first category, and the “Kindle” was born. Amazon’s team is constantly working on ways to kill their own businesses and it appears that they are in a better position to disrupt their own markets.
PESTEL Analysis of Amazon
Some of the essential political factors are that taxes and other political issues are a costly affair. Political disruption can disrupt the supply chain and result in reduced sales. Amazon is facing trade protectionism in the USA from the Trump administration that threatens the existence of foreign firms in the country, although Amazon is an American firm, considerable amount of its goods come from overseas, due to this their operations may be threatened by a possible reduction in the number of imports or tariffs to foreign imports. There are also potential trade deals between the British and American government because of Brexit. Agreements that could serve to ease Amazon´s operations in the UK as an American firm, potentially reducing import taxes and resulting in less regulations.
The economic factors have an important influence on the market and market condition. A good economic condition in a market leads to better sales and higher profits. Even in the times of recessions, the retail industry was doing well. Because of this, it’s safe to say that people will always buy regular items despite the economy. In 2015 E-retail grew with 23%, and more growth is expected. All this indicates that Amazon could see much more growth and increase in profits. Amazon has also received some criticism about reducing jobs traditionally done by human resources, reports show that the firm is actually creating more jobs that its cutting, creating additional jobs in the US and UK at new Amazon facilities. (Vandevelde, 2017)
Social and cultural trends are both important factors behind the growth of e-retail. There has been an increase of mobile technology and growth in digital technology which has been a part of boosting e-retail. Today “everyone” owns a smartphone with access to internet, social media and online shopping, due to the availability of 4G and digital technology sales of retailers like Amazon has increased. In addition to this, millennials like to do most of their shopping online. They get the best products, at the best price delivered to their doorstep, and this is only offered by e-retailers. To market itself better and strike a deeper connection with the customers, the brand must focus on cultural factors.
Technology is a highly important factor in the 21st century, every kind of business must depend on IT and other forms of technology to deliver better services. Technological innovation has become the key to success in the modern era. Customer service is important to keep customers engaged and is the key to build customer loyalty, as well as Social Media is areas where retail businesses have to focus to better engage their customers. Without using technology for marketing, sales and customer relationship management it is difficult to achieve growth. Amazon continues to develop high levels of technology to aid their logistics services, such as HUB, a locker system that allows Amazon delivers to be dropped off even when the customer isn’t home. Recently, Amazon announced that they will be doubling the amount of staff that they employ in their Research and Development center in London, signifying that the company is focusing on increasing their technological proposition.
For businesses worldwide, environmental factors have become more and more important. Sustainability is an important concern and retailers have to focus on several areas like packaging, waste reduction and energy consumption. Amazon has invested a lot in CSR and sustainability, and also engaging the community in sustainability projects. Renewable energy is a key focus area at Amazon. Until 2016, Amazon had never published a sustainability report, raising concern about the environmental impact that the organization’s extensive global operations place on the wider environment (Gunther, 2016)
Legal compliance is also just as important for businesses globally. Any tussle with the law can be very costly for big companies, any mistake can result in big fines and a loss of image for big companies like Amazon. Amazon has separate legal teams to oversee the legal issues and challenges, and as a result from labor to sustainability, there are several areas where Amazon has to deal with significant legal challenges. Laws differ from nation to nation and companies must remain compliant regardless of where they´re doing business, because of this law can be a major pressure when operating internationally, so Amazon must remain cautious.
Amazon is renowned for continuously exploring new pathways and creating new demand in the market space as well as being the low-cost leader in the sale of online media.
To make informed strategic choices, companies such as Amazon, must analyse and consider the benefits of every opportunity. A business model that can be used to determine a plan for product and market expansion, is Ansoff’s matrix, see appendix 1. The model enables the evaluation of four areas of strategic direction: The first area is market penetration, the introduction of an existing product into an existing market. Amazon has used this strategy to encourage existing customers to buy more, for example, the inclusion of free shipping or a 30-day trial on Amazon prime attracts the loyal customers allowing the company to increase market share. (Johnson, Whittington and Regner 2017)
The next direction is product development: entering an existing market with a new product. Amazon uses the technique of “working backwards”. By starting with the customer as opposed to the innovation, the company can see whether the potential product will be of interest to the customer before any official product is released via an advertisement of a “potential” product and the solution to a problem to provokes a public response. In this instance, the first mover advantage applies as they have the chance to build a reputation. (Bort 2016)
An existing product in a new market space is known as market development. Amazon have made some positive advances in the approach to this strategy already, for instance, new channels of distribution. Amazon initiated sale of books via e-commerce but has expanded, allowing consumers to place mail orders on a variety of products.
New products and new markets tend to incur the most risks, as there is every chance the idea may not be successful. Diversification is the leading growth strategy that has enabled Amazon to extend beyond the existing brand.
Amazon’s position has changed due to trying to replicate the ideas of alternative competitors in the past such as Apple and Google which resulted in unsuccess. Kim and Mauborgne’s book on Blue Ocean Strategy states that the key response to a blue ocean strategy is a new blue ocean strategy and this is exactly what Amazon has done.
A Blue Ocean Strategy involves generating a new market where competition is none existent. A both low-cost and differentiation method applied by Amazon to products and services has allowed them to branch into selling E-commerce without rivalry because the opportunities are infinite. Offering substitutes to existing problems as oppose to price competition provides Amazon with the “first mover advantage” before competition enters the market. For example, Amazon launched the E-book and most recently Amazon Go. The aim of this campaign was not to eliminate hard copy books or grocery stores, but to provide a simple alternative that customers didn’t realise they wanted or needed. Disruption has been inevitable in the instance of Amazon; many consumers now prefer E-books and online shopping as opposed to retail on the high street and many believe that Amazon’s new innovations have regarded previous solutions as obsolete. (Kim and Mauborgne 2015)
Changing the strategic direction of the company has improved Amazon’s growth and expansion. The creation large portfolio through diversification has provided Amazon with an advantage over its competitors. The company has been able to distribute finances across all units of the business, furthermore, economies of scope or resources that are not used, can be effective in new markets by contributing to future opportunities. (Johnson, Whittington and Regner 2017)
- Bort, Julie. 2016. ‘How Amazon ‘Works Backwards’ To New Ideas’. Business Insider. https://www.businessinsider.com/amazon-unusual-process-to-decide-on-new-products-2016-9?r=US&IR=T&IR=T.
- Johnson, Gerry, Richard Whittington, and Patrick Regner. 2017. Exploring Strategy Text. 11th ed. Pearson Education Pty Ltd.
- Kim, W. Chan, and Renée Mauborgne. 2015. Blue Ocean Strategy. Havard Business School Publishing Corporation.