Analysis of Business Environment of Amazon.com Inc

Bizning Vakil By Bizning Vakil, 16th Jul 2012 | Follow this author | RSS Feed | Short URL http://nut.bz/39oq9hbh/
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This report presents analysis of Amazon.com Inc’s performance in strategic use of information systems, its competence in developing new products and services. Amazon, initially with one category now offers 16 categories of products. Also, it has had one of fastest growths in Internet history, with revenues reaching 2.8 bln compared to 1,5 bln Google and 0,4 e-Bay. Low price and high quality products, which reduce cost and time, gave Amazon a strong reputation as a reliable supplier.

Introduction

The advantages of internet retailing are increasing as innovations become a game-changing factor in the market. Estimates suggest that on a global scale digital retailing is heading towards 15% to 20% of total sales. The research firm Forrester also forecasts that e-commerce is now approaching $200 billion in revenue in the United States alone. (1)

Even though Amazon.com first of all is an online retail company, simultaneously it develops and invests in its information systems service and prospective industries like Cloud computing. As Bloomberg Businessweek points out, Amazon has the unique ability to launch and run entirely new types of businesses while simultaneously extracting value from existing businesses. (2)

The research was undertaken by applying theoretical frameworks in business strategy, particularly Michael Porter’s Five forces model. In this context the paper will discuss the e-commerce giant Amazon.com Inc’s business model through its strategic use information systems in order to get competitive advantage in its niche market. This document will also comment on main factors and business directions now affecting the success of amazon.com.

Porter’s Five Forces analysis

In order to get a broader picture of the competitive structure of Amazon.com e-business we use Porter’s five forces model. According to Porter (2008) awareness of these five factors allow a company to gain a position which is more profitable and less vulnerable to attack.

The analysis shows that threat of new entrants relatively low, considering previous high entry cost, required investments and equipment. At the same time, internet facilitates market entry easier and allows customers to compare prices of new e-retailers. But ultimately, e-commerce giants like Amazon.com possess advantage over potential competitors in terms of experience, resources, more customers, greater brand recognition and usually react aggressively towards new entrants. In particular, Amazon.com demonstrated very strong ability in detecting potential rivals, which might pose threat to its business and for instance Amazon in 2009 acquired an online shoe store Zappos.com for $ 1.2 bln and rare book seller Shelfari for undisclosed amount. (3)

In contrast, the power of buyers is considered to be relatively high, since customers are able to choose from different e-commerce services, which they can use even from their mobile devices. However, since Amazon does not have physical store and hence offers low prices coupled with good customer service, it manages to use power of buyers to its own advantage.

In the meantime, the power of suppliers is also significant since they can influence the profitability and conditions of ongoing servicing. Amazon.com Inc 2011 Annual report acknowledges the impact the supplier possess, since the company “does not have long-term arrangements with most of its suppliers to guarantee availability of merchandise or services”. This implies that in case of current suppliers “were to stop selling or licensing merchandise, components or services to on acceptable terms, or delay delivery” Amazon “may be unable to procure alternatives from other suppliers in a timely and efficient manner and on acceptable terms”.

Threat of substitute products or services is high, since there are many competitors of Amazon.com in online retailing. But thanks to its continuous innovation in its services and customer-centric organization, Amazon does not face serious threats of substation in short-perspective.

Competitive rivalry in e-commerce is very strong and intensive, since this field is developing very rapidly. In its Annual report (2011) Amazon defines its business environment as ‘intensely competitive’. It views its main current and potential competitors as: (4)

1) physical-world retailers, publishers, vendors, distributors, manufacturers;
2) other online e-commerce and mobile e-commerce sites, including sites that sell or distribute digital content;
3) a number of indirect competitors, including media companies, web portals, comparison shopping websites, and web search engines, either directly or in collaboration with other retailers;
4) companies that provide e-commerce services, including website development, fulfillment, and customer service;
5) companies that provide infrastructure web services or other information storage or computing services or products;

Business innovations and information systems

The analysis of Amazon.com through resource based view perspective illustrates that the company has extremely strong competence in developing innovative technologies, which give the company competitive advantage over its competitors. At the same time Amazon faces skillful competitors in its market, and invests significant resources in IT hardware. This enables it to differentiate on speed and reliability. As Amazon explains in SEC (2005) ‘our strategy is to focus our development efforts on continuous innovation by creating and enhancing the specialized, proprietary software that is unique to our business, and to license or acquire commercially-developed technology for other applications where available and appropriate”. (5)

Amazon.inc strategy in using the information systems was basically based on three pillars: (6)
• Digital boosts customer care
• Digital allows high margin, lowest prices
• Digital enables limitless inventory

In this direction, Amazon also achieved its competitive advantage through the use of information systems, i.e. accumulated information about shopping patterns to improve customer service and website content. An industry analyst with Forrester Research Charles Golvin points Amazon's ability to organize a vast number of products and recommend those that fit each user's preferences.

As a result Amazon’s customer service ranked 1st in Bloomberg Businessweek rating in 2009 and 2011 respectively.

The services that generated the most value allowed Amazon.com to exploit its expertise across a variety of products: auctions, devices to make shopping easier such as 1-Click ordering, and online system that allows consumers to exchange unwanted gifts even before receiving them. (7)

In 2007 Amazon launched its own Amazon payments system (Checkout by Amazon and Amazon Simple Pay) to directly compete with e-Bay’s PayPal and Google Check-out. According to PCWorld (2008), the payment options are intended to help merchants outsource some or all of their online transactions, as well as include such features as single-click payment and tools to manage shipping charges, sales tax, refunds and etc. (8)

Furthermore…

Furthermore, online retailer Amazon.com Inc. also plans to establish an online store that sells applications for smartphones powered by the Android operating system. Amazon will offer app developers the same financial terms as does Google and consumer-electronics firm Apple Inc., which has an app store for its iPhone smartphone. (9)

But more importantly Amazon.com excels at fastest growing form of computing - Cloud computing. Currently Amazon Web Services (“AWS”) is primarily B2B service and designed to provide various information technology related products to customers. These include computing, content delivery, database, deployment and management, industry specific clouds, monitoring of cloud, networking, storage and web traffic among others. (10) One of the advantages of Amazon's cloud computing service is that companies pay only for the space they use.

In B2C segment Amazon provides the Amazon Cloud Drive service which was launched in April 2011. This “cloud” service offers customers free five gigabytes of storage for their music, photos, videos, and other personal documents. Music executives, however, are warning that the company could loose with copyright as it hurries to beat iTunes and Google Inc. to market using the solution. (11)

Despite sophisticated infrastructure, technical problems still figure as a key challenge to Amazon’s cloud computing business. For instance, in April 2011 it was reported that Amazon encountered certain problems with its Relational Database Services (a web service that allows to set up, operate, and scale a relational database in the cloud), and Elastic Compute Cloud, a cloud computing service hosted at its North Virginia data centre. The incident was caused due to the shifting of the network traffic to the wrong router. (12) It took Amazon staff 10 days to resolve this problem, which may indicate about the seriousness of the outage. In addition, on August the same year similar problem affected Netflix’s streaming service, Reddit and Quora websites.

More importantly, such outage of Amazon’s essential services raised issue of confidence and “reinforced an already-held belief that cloud services can't match an enterprise IT operation when it comes to meeting the technology needs of business or government entities”. (13) As Paul Haugan, CTO for the city of Lynnwood, Wash. put it “the recent outage confirmed that cloud services are not yet ready for prime time and cloud services need some more maturing and a much more hardened infrastructure and security model prior to our adoption”.

Conclusion

The most successful internet retailer Amazon.com’s competitive advantage proves to be in its continuous innovation in business strategy and information systems. Particularly the company attaches very high importance to information systems as the cornerstone and future of its business.

Research shows that Amazon.com is facing more fierce competition in the market. And in the light of intense competitive environment, with plethora of companies offering similar services, there is fundamental need for Amazon.com further improve its technical base. This notion is strengthened by the fact that in case the continuation of outages and technical problems company serve as a strong argument against these systems and eventually company might loose lucrative clients, such as government institutions and large MNC’s who now are considering migration to the cloud system.

References

1. Rigby, D 2011, 'The Future of Shopping', Harvard Business Review, 89, 12, pp. 64-75, Business Source Premier, EBSCOhost,
2. Mark W. Johnson. Amazon's Smart Innovation Strategy. Available from:<http://www.businessweek.com/print/innovate/content/apr2010/id20100412_520351.htm>
3. Hadro, J 2008, 'Amazon Acquires Shelfari', Library Journal, 133, 15, p. 20, Academic Search Premier, EBSCOhost,
4. Amazon.com Inc 2011 annual report. Available at <http://phx.corporate-ir.net/phoenix.zhtml?c=97664&p=irol-reportsannual>
5. Cited in Chaffey D. Amazon.com case study. Available from: <http://www.smartinsights.com/digital-marketing-strategy/online-business-revenue-models/amazon-case-study/
6. Distinguin S. Amazon.com: the Hidden Empire, faberNovel, May 2011.
7. Filson D. Journal of Business. The Impact of E-Commerce Strategies on Firm Value: Lessons from Amazon.com and Its Early competitors. pS 152
8. Cited in 'Amazon Expands Online Payment Options for Consumers' 2008, Certification Magazine, 10, 10, p. 7, Business Source Premier, EBSCOhost,
9. Amazon Amps Up Apps Rivalry. October 7, 2010. Wall Street Journal - Eastern Edition; 10/8/2010, Vol. 256 Issue 84, pB1-B2. Available from: <http://online.wsj.com/article/SB10001424052748704696304575538273116222304.html#>
10. Amazon Web Services products. Available from <http://aws.amazon.com/products/>
11. Forde, E 2011, 'Amazon makes a dash for cloud cover', Music Week, 14, p. 12, Business Source Premier, EBSCOhost,
12. Datamonitor: Amazon.com, Inc. Company Profile. pp. 1-11, Business source premier, EBSCOhost,
13. Amazon Service Outage Reinforces Cloud Doubts. By: Thibodeau, Patrick, Vijayan, Jaikumar, Mearian, Lucas, Computerworld, 00104841, 5/9/2011, Vol. 45, Issue 9

Tags

Amazon Business Review, Amazoncom, Business Environment, Porters Five Forces

Meet the author

author avatar Bizning Vakil
An economist by definition, a teacher by practice, a journalist by nature, I find it hard to find any one permanent place to settle down...

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17th Jul 2012 (#)

A very informative article about Amazon and well written too!

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