Amazons Strategy
Amazons strategy has been based on several key points.
Threat of new entrants
For Amazon, the threat of new entrants will always be there as entry to the market is cheap and relatively easy to set up. Without the costs to build a chain of physical stores, firms can enter and exit readily. Amazon is effectively an online retail store, so potentially they could be up against all of the big traditional retailers who still have decided not to gain an Internet presence, but have remained 100% brick and mortar stores. This threat was seen to great effect recently when Wal-Mart (one of the world’s largest retail shops) set up their website (Walmart.com) in November 1999 and by December 2000 had an impressive 7 million unique visitors to their website in that month as compared to Amazons 21 million unique visitors, even though Amazon have been in existence since 1995.
The bricks and mortars companies have instant access to scale of economies, brand recognition, in-store advertising and a supply chain so Amazon knows that potentially, companies with traditional advantages could gain a share of the market. As like any other type of successful company, anything that works will be copied all over the place. As soon as it became successful, Amazon was the target of a ferocious assault from Barnes and noble, the largest terrestrial bookseller in America, which copied its website fairly closely. The only defence against such a thing would be to have a legal, patentable monopoly on the way you do business. In early 2000, Amazon took out patents on two features, which it pioneered, but which nonetheless have been copied all over the web since then.
The first is "1-Click Shopping", which allows you to buy many things instantly after entering your credit card and shipping details once. This patent is subject to a patent lawsuit between Amazon and Barnes and Noble mainly because this is one of the most important advantages that Internet shopping has over the real thing, and all other forms of mail order. The second is the affiliates programme where the company gives a commission on books that it sells to people who have followed a link from someone else’s website.
Having said that, Amazon has two supreme advantages, which will always stand to them:
1) High Level economies of scale
Amazon was the first online ordering company, which gave them the elusive value of 1st mover advantage. What this has meant is that they are world leaders in brand awareness and in peoples minds mainly due to excellent advertising and marketing campaigns. One of the early deals negotiated was with massive Internet portal www.msn.com (a subsidiary of Microsoft). The deal cost Amazon just £17 Million for a three year period which these days would cost competitors approximately $500M. As a result, people all over the world were offered links and ads on Msn’s site, helping drive customers to the Amazon.com website and improving the brand name all over the world. The company has also registered domains in Japan, UK, France and Germany. (I.e. amazon.co.jp, amazon.co.uk, amazon.fr and amazon.de).
With Internet use continuing to climb, the scramble to become top of peoples mind with consumers is growing more heated. A study conducted by Princeton, N.J.-based Opinion Research Corp. found that in the fourth months between May and August, the number of U.S. adults on the Internet rose 11.8%. Since April, 23.1 million adults logged onto the Internet for the first time. The brand awareness leaders: amazon.com and priceline.com, both of which are now recognized by more than 100 million adults.
Access to Channels of distribution and relationships
Amazon has devised two services called ‘Advantage’ and ‘Associates Amazon’ which intends to radically break up the traditional book publisher’s value chain. In a world where few publishers enjoy brand name recognition, Advantage is a catalogue service for publishers which allows them to:
Amazon estimate there to be between 10,000 and 50,000 independent publishers in the US alone. Amazon claim to have up to 200,000 ‘Associate’ websites where anyone with a website can have a link to the Amazon products database and can gain up to 15% of sales.
Amazons competitors have not so far delved into this horizontal and vertical integration yet.
Amazon have entered into strategic relationships with prominent companies, notably:
The latest ecommerce development has been WAP where users can buy products online using their mobile phones and Personal Digital assistants (PDA). Amazon have sealed up this channel of purchase by signing deals with mobile phone companies such as Motorola, Nokia, Bell, Vodafone and Sprint. As a result, Amazon are ensuring that their brand name will seen and used on the very latest of retail distribution channel. Other areas also include music downloads such as E-books.
As a result of these deals Amazon.com can advertise links and activities including the sales of products and services on co-branded sections of the Amazon website. This power would make it extremely difficult for competitors to forcefully enter any of these areas. By relationships in each market, Amazon can assess where possible future goldmines may be.
Threat of Substitute Products
Amazon is under no great threat from substitute products. As Amazon have spread beyond books to areas such as toys, music, DVD, Electronic gadgets, videogames, cars, clothing, flowers etc, they have helped spread their own risk from substitute products. If one type of product is threatened by a substitute product, then it won’t be the end of the world.
If one looks at books, then one could say that these may be threatened by technological innovations such as e-books, where readers can download books off the net onto their PDA’s. Amazon recently signed up the novelist Stephen King and released his latest novels ("Riding the Bullet" & "The Plant") on the net for a modest fee of $1, which had 100,000 hits.
Even though it is early days yet, Amazon may be under threat from online auction websites like Ebay.com and Ebid.com, where second-hand books, CDs etc can be bought online for (usually) a cheaper price than from Amazon. Another unknown, whom Amazon must be careful about, is Web TV where people can buy online using their television.
The bargaining power of suppliers
Originally in the years 1996-98 when Amazon was primarily a book retailer, it had three main suppliers: Ingram, Baker & Taylor (B&T), and Valley Media. Ingram were the main supplier providing Amazon with 60% of its gooks in 1996, 59% in; 97 and 40% in 1998. In 1999, Amazons main online rival, BarnesandNoble.com bought Ingram and since then Amazon failed to declare the spread of book suppliers in their annual reports.
Perhaps they learned a lesson by not depending on a few suppliers as now they have 10,000 suppliers. As a result one would have to say that with such a huge number of diversified suppliers, that the bargaining power of suppliers is low to medium.
The bargaining power of buyers
The bargaining power of buyers is quite good as there are numerous websites all over the world selling goods online. Users can research the product easily by browsing through the web using search engines and with the click of the mouse can see which site offers the best deals. There are also several comparative websites, which can compare products across a number of websites and tell the user where they can buy the cheapest book or CD.
Having said that users are extremely aware of the brand name Amazon and more than likely will start searching for a product on the Amazon.com website. The fact that Amazon is known for having an extremely secure and cheap service would ‘force’ buyers to buy on Amazon.com.
Recently a number of investigations have shown that Amazon has in fact lessened the bargaining power of buyers:
Apparently these techniques are not illegal. So in effect, through technology, buyers, unknown to themselves may be directed to websites (such as Amazon) that they normally wouldn’t go to.