Business Model of Amazon

Opening of the internet to commercial activity, the creation of naming conventions for URLs and the development of a user friendly and free interface i. e. the browser were the three major developments that led to the advent of what is known as “e-business”. As the economy has moved from agrarian to industrial to information age, the focus of the businessmen or the wealthy and powerful has also shifted in terms of the ways of obtaining wealth or doing business. In the agrarian age there was shortage of land which made ownership of land as the determinant of value.
Powerful land barons typically accumulated vast tracts of land and coerced people who were bound to the land and owned by the feudal lord into living on and working it. As economy moved from agrarian to industrial age, physical assets owned by a firm became the determinants of value and shortage of raw-materials led the powerful industrialists to conspire to control the supply of raw materials. In this age, the market could absorb as much product as the industrialists could produce.
The current era in which we live has been defined as the information age wherein relationships and intellectual capital are more important than anything else. One is not worried about physical assets anymore. Companies don’t compete with each other over superior products as they are largely commoditized rather compete increasingly on the basis of value added customer services. The economic battles of today are fought over the mind-space of consumers. In the information age power-play customers are not passive participants, in the way that land and raw materials were in the agrarian and industrial ages.

In fact, according to Zang Hailing, it is the customers’ time that is in short supply, and therefore for any firm to succeed, emphasis needs to be given to the importance of reducing the customers’ time to adopt a new product. Thus, in a world where technology is changing every day and the transformation of consumers has happened from “Price Takers” to “Price Makers” as they are armed with more options and information; the companies that control more and more customer relationships will be the ones that hold the power in an industry and reap the lion’s share of the profits.
E-commerce or e-business is an important tool that enables companies to reach out to the global market at low cost and provides abundant information about the consumers’ requirements and preferences easily which was not so easy earlier. Following figure is a glimpse of the promising future that the ecommerce industry holds. The US E-commerce has seen a 40% increase in the sales over the past 5 years as a percentage of the total retail sales in US. Source: http://ycharts. com Now when thinks about e-commerce, the first name that comes to everyone’s mind is that of Amazon. com.
Not only most of the people have heard about it but there are many people who have actually used its services. Amazon was not only one of the few of the companies that thrived throughout the period in which many dot-com companies struggled to survive but has been constantly performing exceptionally well in terms of revenue per visitor which is one of the key parameters for any commercial website. Amazon has had one of the fastest growths in the internet’s history with revenues reaching $2, 8 billion in the first five years with Google’s revenue reaching only $15bn in the first five years.
Now, just like any other traditional business in order to clearly understand an e-business one needs to have information on the following components: a) Business Strategy which determines the products and service offerings by the firm, the firms targeted customers and the firms value proposition. It also helps firms decide on the choices and the tradeoffs that the firm needs to make. b) Organizational form or structure c) Business processes which refer to the unique ways in which organizations coordinate and organize work activities, information, and knowledge to produce a product or service. ) Value Chain i. e. the sequence of activities that a firm undertakes to create value, including the various steps of the supply chain but also additional activities, such as marketing, sales, and service. e) Core Competencies which are the collective learning’s of the firms and being distinctive create long term competitive advantage for the firm. From the beginning, the focus of Amazon. com has been on offering their customers compelling value. In the current report filing dated 04/13/12, Jeffrey Bezos, the founder and CEO of Amazon. om writes “We realized that the Web was, and still is, the World Wide Wait. Therefore, we set out to offer customers something they simply could not get any other way, and began serving them with books. We brought them much more selection than was possible in a physical store (our store would now occupy 6 football fields), and presented it in a useful, easy-to-search, and easy-to-browse format in a store open 365 days a year, 24 hours a day. ” The Value Proposition offered by Amazon. com is “earth’s largest selection—24/7, at competitive price. ” Amazon. om has continuously focused on improving the shopping experience owing to which they substantially enhanced their stores in 1997. Though they started off with books, they now offer customers gift certificates, 1-ClickSM shopping, and vastly more reviews, content, browsing options, and recommendation features. The company’s stated goal was to “be Earth’s most customer centric company for three primary customer sets: consumers, sellers and developers. ” It targeted its first set of customers through its initial retail model where it sold only books.
It offered the perfect combination of low prices, large selection and convenience or customer experience. The digital media allowed limitless inventory, boosted customer care and allowed higher margins and hence lowest prices. In 15 years Amazon went from 1 category to 16 main categories of books. Amazon began with books and needed to grow big fast. From 1995-1998, Amazon moved from books to music and again through the same combination moved to become the biggest seller of music in just 120 days! Amazon moved on develop its own digital driven supply chain and distribution network by hiring from the expert: Wal-Mart.
Amazon accelerated development through its strategy of “Build, buy, partner” a) Build: Amazon keeps on creating new categories. For example, Amazon kicked off a new service by the name MyHabit. com in May 2011 that made fashion available to consumers directly from designers and boutique brands. b) Buy: When there is a lot of competition in any area and the competitors have a strong hold, Amazon believes in buying out the incumbent. Few of the acquisitions made by Amazon include Internet Movie Database (IMDb), Zappos (an online shoe and apparel retailer) etc. ) Partner: Amazon has also entered into a lot of merchant partnerships. It offers its technological service and ecommerce expertise to third- parties. For example in October 2011, Amazon. com announced a partnership with DC Comics for the exclusive digital rights to many popular comics, including Superman, Batman, Green Lantern, The Sandman, and Watchmen. As mentioned before as well, Amazon want to be the “world’s most customer-centric” company, and so their focus is on the “Customer Service”. It ensures customer loyalty through three main approaches: a) Recurring usage b) Seamless Integration c) Lock-in
The following table tells us how Amazon uses all above mentioned approaches for its both customers: Sellers and consumers. | Sellers| Consumers| Recurring Usage| a. Developed a customer base close to 615mn users that can’t be ignored by sellers b. Ensures profit through optimized and reliable technology c. Developed a trusted Brand name| a. Created an ecosystem through Kindle b. Stores user’s media library c. Offers personalization to customers d. Gives special offers everyday| Seamless Integration| a. Monitors sellers rating ratings posted by consumers and expels sellers with bad ratings b.
Offers Fulfillment by Amazon service(FBA) which allows third party sellers to use Amazon’s large warehouse and distribution network| a. For customers, all the sellers are highly commoditized and invisible. They buy it because of the Amazons brand value b. Get benefitted by Amazon Prime and free super saver shipping| Lock-in| a. By controlling or owning the customer accounts b. High level of infrastructure development required to ensure same level of customer service as offered by Amazon| a. By providing digital content that works only on Kindle b. Amazon Prime Program which requires annual subscription| | c. | c. |
Amazon developed a value chain of itself for internal appraisal so as to identify its strengths and weaknesses that would help it add value and maintain a competitive advantage. Amazon uses the value chain model from Michael Porter’s book, “Competitive Advantage: Creating and Sustaining Superior Performance. ” The first table represents the Primary activities of Amazon which are needed to produce a product or services for the end customers. Inbound logistics| Operations| Outbound logistics| Marketing ; Sales| Service| Avoids the overhead and large amounts of inventory carrying cost because it orders the books from the distributors. Easy and fast payment systems. Online customer systems and feedback. | Operates a number of transportation hubs that they refer to as injection points. Injection point locations are located in heavily customer concentrated areas. | Customer tracking is an Amazon stronghold through which it provides personalized customers’ experience| Free return policy within 30 days. Uses marketplace to increase channel and range of goods through 3rd parties and customers. Highly reduced returns to suppliers (such as unsold books and media) due to available accurate forecasting technology | Customized buyer experience| Ability to aggregate orders bound for specific locations. | Interactive shipping and parceling price calculations. Free delivery based on single transaction spends. | Price comparison of new products with used products in marketplace shops. | Efficiently gathering information about customer experiences to inform service inputs and inventory controls. | 24 hour warehouse operations to meet customer demands. |  Utilizes the capabilities of its supply chain partners to deliver orders directly to ustomers which bypass the Amazon. com internal distribution center network|  Discounts and price reductions made available with suggested product mixes. Similar products recommended to customers interactively. | Offers customers gift certificates, 1-Click SM shopping, and vastly more reviews, content, browsing options, and recommendation features. | The next table gives information about the various support activities performed by Amazon which help to facilitate or assist its primary activities. | Value Creation| Cost Reduction| Firm Infrastructure| Huge central customer data warehouse available to all business units. Amazon’s single technology platform with services being incrementally distributed to other worldwide locations, reduces costs by leveraging investments | Human Resource Management| Amazon. com has a great training for its employees resulting in talented, smart and hard working group. Offers employees unique benefits such as medical, paid time off and stock grants and relocation allowances and hence attract highly skilled workers| Amazon utilizes independent contractors and temporary personnel to supplement their workforce, particularly on a seasonal basis.
Although Amazon has works councils and statutory employee representation obligations in certain countries, Amazon’s employees are not represented by a labor union| Technology Development| High investments in technology development (e. g. , Kindle) to best leverage digital products. Innovations such as personalized recommendations, one-click ordering, and search inside the book are all Amazon. com innovations. Highly customized software applications that support their supply chain business model. For example, Amazon. om is linked into Ingram’s systems to see Ingram inventory levels when deciding whether to use Ingram to drop ship an order to a customer | Building an IT strategy, IT infrastructure and Data Centre on Linux open source software thus reducing cost of technology development. Renting computing resources to other companies reduce total cost of ownership Using standard hardware systems from HP to reduce cost of maintenance and compatibility| Procurement| Utilizes a Sales and Operations (S&OP) planning process to determine forecasts for each roduct that it stores in its distribution center inventoryUses the strategic business unit – Booksurge to keep a rich inventory of digital copies of books so as to make this readily available for customers through print-on-demand and reduce the time of delivery | Specially built distribution Centers, warehouses and fulfillment Centers to increase the speed of order processing thus avoiding transaction costs of contracting out| In addition to the business strategies the value chain components mentioned above, the success of Amazon. om can be attributed to the entrepreneurial spirit of its founder & chief executive officer Jeff Bezos and the strong inclination of the firm towards bringing about innovation in the business model. Let us discuss both factors one by one. Entrepreneurial Spirit of Jeff Bezos: Jeff Bezos can be regarded as the forward-looking CEO responsible for the success of Amazon. com. He has not only efficiently managed the present but through his long term vision always taken steps to create the future. The computer science and electrical engineering graduate from Princeton University moved to Seattle after resigning as a Senior Vice-President at D.
E. Shaw, a Wall Street investment bank. At the time Bezos didn’t know much about the Internet but he came across a statistic that the Internet was growing at 2300%, which convinced him that it was a large growth opportunity. Without knowing anything more, he plunged into the world of e-commerce with no prior retailing experience. It was his decision to locate the company in Seattle because it had a large pool of technical talent and since it was close to one of the largest book wholesalers located in Rosenburg, Oregon.
Moreover, the sales tax laws for online retailers state that one has to charge sales tax in the state in which one is incorporated. Therefore it was logical to locate in a small state. Under his guidance and logical thinking Amazon. com quickly became the leader in e-commerce. Operating 24 hours a day, the site was user-friendly and encouraged browsers to post their own reviews of books and offering discounts, personalized recommendations, and searches for out-of-print books. In June 1998 it began selling CDs, and later that year it added videos.
In 1999 Bezos, looking at the future trends, added auctions to the site and invested in other virtual stores. The success of Amazon. com encouraged other retailers, including major book chains, to establish online stores. As more companies battled for Internet dollars, Bezos saw the need to diversify, and by 2005 Amazon. com offered a vast array of products, including consumer electronics, apparel, and hardware. And with the Jeff Bezos vision to make every book ever in print in any language available to the consumer in 60 seconds, Amazon launched the handheld device called Kindle in 2007.
Bezos is the quintessential dot-com icon. He proved to the business world that the Internet was about more than knowledge. He proved that it is possible to overcome fears about purchasing online, to drive down transaction costs, and to build an international e-commerce business over the Internet. He had the courage to attempt something that people doubted could be done. . At the age of 35, Jeff Bezos was picked as the 1999 Time person of the year. Describing why it chose Bezos, Time magazine said, “Bezos’ vision of the online retailing universe was so complete, his Amazon. om site so elegant and appealing that it became from Day One the point of reference for anyone who had anything to sell online. ” Innovation in the Business Model: Amazon survived the dot-com bust because it had a viable and innovative business model built around a market-changing customer value proposition and a radical profit formula and over it has been able to sustain its position as the leader in e-commerce by bringing about continuous innovations in its business model. Let us look at some of the different dimensions wherein Amazon. om has been able to bring about business innovation. a) Offerings: By offering a handheld device dedicated to reading, Kindle, Amazon. com revolutionized the books industry. By creating a product like Kindle, the created a perfect, integrated and streamlined customer experience. b) Platform: With Amazon Web Services, Fulfillment By Amazon, and Kindle Direct Publishing, Amazon is creating powerful self-service platforms that allow thousands of people to boldly experiment and accomplish things that would otherwise be impossible or impractical. ) Customers: In 2002 Amazon launched a web services platform and identified a new area of potential growth by finding another new customer—the IT community. Serving this new customer’s needs required different processes, different resources, and a different profit formula—in short, another new business model. d) Customer Experience: 1-Click combined with Gift-Click and Wish List made Amazon. com the most convenient, easiest-to-use shopping destination the holiday season.
Wish List allows customers to post the gifts they’d most like to receive from family and friends, while Gift-Click allows customers to send gifts easily by entering just the e-mail addresses of their recipients. e) Value Capture: By opening up its storefront to other retailers that were essentially competitors, Amazon transformed its business from direct sales to a sales-and-service model, aggregating many sellers under one virtual roof and receiving commissions from the other companies’ sales. ) Supply Chain: Fulfillment by Amazon service (FBA) by Amazon is a classic example of innovating business model through supply chain. FBA allows third party sellers to use Amazon’s large warehouse and distribution network and in the last quarter of 2011, shipped tens of millions of items on behalf of sellers. When sellers use FBA, their items become eligible for Amazon Prime, for Super Saver Shipping, and for Amazon returns processing and customer service.
From the above discussion of Amazon’s business strategy, value chain analysis and the success factors we can conclude that Amazon has a robust Business model. Amazon’s business model fends off all the four threats. It has the costly-to-imitate financial and technological resources, it has developed protection against holdup by seamlessly vertically integrating its both the customers i. e. the sellers and the consumers. Reduced slack by locking-in the customers and the sellers and fights substitution through innovation in business model.

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