Competitive Position Assignment – Amazon

-Afzal Hussain
Introduction
Amazon is a company founded in Seattle in 1994 by Jeff Bezos, which at present
continues to be the Chief Executive of the firm. The company started as one of
the first to sell goods through the internet. At the beginning, they began only as
an online book store, but rapidly diversified into selling other products and
services, making Amazon the world largest online retailer. At present Amazon’s
business can be segmented in online retail, internet services and Kindle
ecosystem. Therefore, it is difficult to locate Amazon in just one industry.
However, regardless the different lines of businesses, the vision of the company
and its main value have remained the same. The main value proposition
continues to be low price and customer convenience and its mission has always
been: “Our vision is to be earth's most customer centric company; to build a place
where people can come to find and discover anything they might want to buy
online.”

Industry Structure Analysis-

Due to Amazon’s constant expansion into new markets, it is important to clearly
define the market segment and its constraints while doing the following Five
Forces analysis. In this case, only the E-retail industry will be considered, due to its
core value for Amazon.
Threat of entry is considered to be medium in the online retail industry mainly
because sunk costs can be considered low compared to other industries: it is not
expensive to open an online source and sell products from other suppliers. Due to
its ‘apparent’ simplicity, many entrepreneurial ventures are based within this
industry nowadays. Therefore, new entries into the market are possible.
However, it is important to take into account that incumbents within this industry
have an important competitive advantage (Amazon is the main leader of this
industry and therefore, presents a clear example of having a dominating
competitive position). In this case, the competitive advantages of incumbents can
be their brand (Amazon is very well recognized by buyers), their large economy of
scales and their learning curves.
Mainly due to its learning curve, the MES (Minimum Efficient Scale) matters a lot
in this industry: a new entrant will hardly be able to offer a more competitive
price than Amazon for the same product. Mainly due to this fact, an entrant into
this industry may face retaliation from the incumbents (cost advantage). In this
case, threat of substitutes is considered medium, because there are some
‘contradictory’ facts. For instance, as mentioned above, switching costs are
relatively low due to the fact that the buyer can change easily from one firm to
another one if the price is lower or equal. In this sense, customers do not face any
one-time cost when switching. However, besides this, elasticity of demand is low.
An increase of demand will not affect the market price of a product, because the
capacity of the market will be able to absorb its ‘potential substitute’ demand
without the need of decreasing price.

The customer in this industry is often referred to as the whole mass market.
Therefore, buyers are numerous and from different categories. Though, referring
to the concepts from the lectures, no Monopsony is taking place in this industry:
buyers are not concentrated. Moreover, buyers are segmented for many reasons:
although price information is widely available, price discrimination is possible,
because the prices can change without that the buyer realizes (for promotions,
for stock management, etc.). Moreover, bundling of buyers is possible using the
past purchase data of each buyer and analyzing its routine. Finally, buyers have
few other options taking into account that Amazon is constantly offering the
lowest prices and that buyers cannot backward integrate. In this industry,
bargaining power of suppliers is very low, due to the wide diversity of suppliers.
They are not concentrated, as the industry works with so many different
products, no supplier can achieve selling a large percentage of the industry
purchases. Besides this, firms within this industry have many alternatives,
because there are many suppliers for a same product (substitutes) and thus, the
switching cost is very low for firms. For this reason, Amazon was able to negotiate
to not pay their suppliers until the moment that Amazon sells the final product.
Moreover, suppliers cannot forward integrate because the selling channel offered
by firms in e-retail is unique and a lot wider than the one of the supplier. A
consequence of a high intensity of rivalry is low margins. Low margins are
common in the online retail industry and thus, one can assume that the intensity
of rivalry is high. Moreover, rivalry is low if the numbers of competitors are
limited to a few. However, as stated before, it is relatively easy to enter the online
retail industry and therefore, competitors are numerous. Besides this, online
retail industry demand is not constant and moreover, it is continually varying and
moving to new market products difficult to predict. This fact, together with the
difficulty to differentiate from competitors, is an incentive to strong competition
for more market share.

Competitor Analysis (Exhibit 2) For this analysis, 4 direct competitors in the e-

retail industry have been considered: Target, Wal-Mart, Ebay etc. Different
strategic fields have been considered in order to compare the position of each
firm within those categories: Revenues, Market Share, Brand recognition,
Geographic coverage, Cost structure, Breadth of product lines and Breadth of
channel coverage. Ebay is the only main competitor in terms of market share
(Exhibit 3).
Capabilities Analysis (Exhibit 4) Amazon’s core capability is to be the most
convenient place to buy any imaginable good at the lowest price of the market.
Having the best employees allows Amazon to always be on top and improving
continuously. High skilled employees therefore are a key factor for Amazon.
Besides this, the costumer relationship is very important for Amazon to become
the most convenient place to buy. The key success of Amazon is its customer
feedback. The relationship with him is always the priority, the costumer needs to
feels comfortable buying and finding inside Amazon. It is a pleasure for the
costumer to go into Amazon to find what he/she needs. Once again, it is the most
convenient place, at the best price. Customer relationship should also be
considered as one part of the process inside its core capability, because it is the
procedure followed by Amazon to transmit to its costumer that Amazon is the
most convenient place to buy everything. Always keep him happy; the customer
will never have any problem to find what he/she is looking for during the
purchase process. Moreover, this is straightly linked to Amazon’s brand
recognition. One of the key successes of Amazon is its online platform and its
knowledge about internet services. Due to this high level of know-how, some new
lines of business such as the web services have been developed.
Its core capability is totally aligned with its vision. The vision states the will to be
the most customer centric company. Amazon wants to be a place where
everything can be found and bought online. In fact, the ability to provide this is its
main capability. Amazon provides a ‘comfortable’ competitive advantage with
competitors. Finally, it is a sustainable capability in terms of imitability. Amazon’s
core capability is not a tangible asset and therefore, it is more difficult for
competitors to copy or acquire that capability. Moreover, this competitive
advantage is expected to be durable if the company keeps their R&D investment.
Competitive Position Referring to generic competitive positions from Michael E.
Porter, as it has been mentioned in class, two main Amazon’s competitors have a
clear position within this table. For instance, Wal-Mart is clearly located in a cost
leadership position offering low prices for a wide range of standardized products.
Besides this, Target is located in a differentiation competitive position, because
even if their prices may be considered as low, they try to target specific types of
costumers. Considering these facts, Amazon’s competitive position is the result of
integrated strategies. This is a difficult position to achieve and firms have to be
careful in order to not get blocked in the middle. However, Amazon has been
successfully integrating a Cost Leadership position together with a Differentiation
position. A key success of Amazon is that they are able to offer low prices and at
the same time, be considered a unique place to buy any type of products.
Moreover, this is always in a broad competitive scope. A strategic map
considering two factors is presented in Exhibit 5. Just two factors are considered
in it: product price and product breadth. As a result, Amazon is located in the
same position of Wal-Mart. From my point of view, I would include a third
important factor which belongs to the core value of Amazon: convenience.
Therefore, this third factor is added (Exhibit 6) in order to observe the
advantageous competitive position of Amazon along the other competitors.
References:
[1] http://www.digitalbusinessmodelguru.com/2013/07/analysis-of-amazon-business-
model.html
[2] http://www.bloomberg.com/news/articles/2011-10-25/amazon-profit-plunges-after- new-
products-increase-expenses-shares-tumble
[3] http://www.businesswire.com/news/home/20151119006690/en/
[4] http://retailindustry.about.com/od/retailbestpractices/ig/Company-Mission-
Statements/Amazon-com-Mission-Statement.htm
[5] https://stratechery.com/2013/amazon-benefits-vision/
[6] http://www.slideshare.net/ell82iza/porters-5-forces-model-40341408
[7] http://cdn.corporate.walmart.com/66/e5/9ff9a87445949173fde56316ac5f/2014- annual-
report.pdf
[8] http://www.marketwatch.com/investing/Stock/AMZN/financials?CountryCode=US [9]
http://www.slideshare.net/gabbibaker/strategy-presentation-on-amazon