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Business Model and Strategy Analysis of Amazon Inc
Business Model and Strategy Analysis of Amazon Inc
With an increase globalisation pressures all over the globe, almost every business, regardless of its size and nature of operations, is forced to attract more target audience (target market), serve more customer base, abandon some business units/products and acquire more market share . This is particularly true in case of those businesses having worldwide operations and which serve as multinational companies across boundaries. In the global marketplace, all of these multinational businesses compete with one another to capture more market share. These companies attain this purpose by widening their product line, expanding operational activities or both.
In view of this, it is important that the business model and corporate strategies of these global businesses should be looked into. This analysis must be followed by identification of the company’s challenges and opportunities that help in tracking the strengths, weaknesses, opportunities and threats to business operations . Therefore, as the nature of doing business have been changing, this research paper is written to examine a popular e-business known with the name of Amazon Inc. which reserves a largest market share in the global online retail service industry.
In this paper, firstly, an introduction of Amazon Inc. is presented which followed by identification and analysis of its business model and corporate strategies. This is followed by examination of various challenges which Amazon Inc has been facing while conducting its business in the face of existing competition. From these challenges, various opportunities are also pointed out exploiting which Amazon Inc. could remain competitive in the global online retail business industry.
In the diverse world on online retail business activity, Amazon Inc. is an American ecommerce company in the United States which is headquartered in Seattle, Washington. The company started its operations on July 6th, 1994 as an online bookstore. Soon, the business activities were diversified to include selling of VHSs, DVDs, CDs, MP3 and video streaming/downloads, video games, apparel, furniture, electronics, software, jewellery, toys and food. Amazon Inc. is also involved in the production of consumer electronics, Fire tablets, Fire Phone, Fire TV and Amazon Kindle e-book readers. The company also provides cloud computing services. Amazon Inc. also markets some low-end products such as USB cables etc.
Currently, Amazon Inc. is a publicly traded company and serves the worldwide customer base (involving individuals and businesses) providing a wide range of products and services with the support from approximately 154,100 employees. On a broader scale, Amazon Inc. provides a third-party and online retail services whose wide array of product typically range from music and books to clothing and furniture.
Business Model of Amazon Inc
As one of the market leaders in the online retail service industry, Amazon Inc. conducts is operational activities by following several business models designed to attract, capture and retain individual as well as business customers in order to keep up with evolving technological and ever-changing customer preferences. From an electronic commerce perspective, Amazon Inc. conducts business through exploitation of the business-to-consumer (B2C) and business-to-business (B2B) commerce.
Specifically, the e-business under review (Amazon Inc.) follows a fixed cost business model. By using the internet technology, Amazon Inc. is able to make the most of it by getting optimal leverage from the efficient and effective utilisation of fixed assets. The business model is that once the company generates sufficient sales volume, astonishingly, the total income generated from operations usually exceeds the company’s fixed cost base. This, in the end, reveals that Amazon Inc. has generated lucrative profits to support operations and create value for all stakeholders. In other words, Amazon Inc. depends heavily on generation of online or internet based sales revenue and remote warehouses for competing effectively against other competitors (major discount retailers) such as Ali-Baba, eBay and Wal-Mart etc.
Three Pillars of Amazon’s Business Model
Business model which Amazon Inc. follows is based on three pillars which provide this online retail business with a competitive edge relative to its competitors. The first one of these which is working for Amazon Inc. particularly is a fixed cost and low profit margin pillar. After evaluating the financial performance, one can find that Amazon Inc. though follows low-margin model yet it earns major portion through economies of scale.
The second pillar on which the business model of Amazon Inc. is based dictates that customers should be able to find their preferred deals (products and services) with little or no effort at all. To achieve this, Amazon Inc. follows a “business strategy” for investing significant amount of effort and cost for appearing always on the top of search engine results for which Amazon Inc. communicates with its clientele on a regular basis to know their preferences. This pillar also depicts that customers should get their products delivered as soon as possible and that the company should make the delivery within the promised time frame.
The third pillar of Amazon’s business model obliges the e-business company to design and develop customer-oriented services. The management of Amazon Inc. has come up with such services which include Subscribe & Save, one-day shipping and Amazon Prime etc. All of these services are designed in a way that encourages customer to increase their frequency of purchases which is heavily influenced by income of every potential and existing customer. Statistics on yearly income available for spending in case of Amazon’s consumer averages to a rough estimate of $89,000 which is twenty five percent more than average income any U.S. citizen .
Business Strategy Which Amazon Inc. Follows
Amazon Inc. has been adopting various technological advances which have resulted in a shift from business model of “sell all, carry few” to “sell all, carry more”. Amazon’s business model is based on instant shipments to customers for which the company has been following a business strategy of lowering shipping costs while the speed of shipping items to customers is increasing. Following a corporate strategy of cheap, and at the same time fast, shipment of products to consumers has caused the sales volume of Amazon to increase in a drastic manner possible .
The business strategy of Amazon Inc revolves around the business model of efficient logistics and excellent shipment performance. This business strategy drives the customers crazy when it is observed that their orders are shipped and delivered to their doorstep at a quick and faster pace. As a Amazon Inc. can have multiple corporate strategies to conduct their business, one of its business strategy is to keep focusing on consumer preferences and experience by offering their preferred wide range of merchandise/deals at low prices in convenient manner .
Challenges Faced by e-Business Retailer, Amazon Inc
After analysing business activities of Amazon Inc. and its past performance, one may say that this publicly traded online retail business has enormous growth opportunities in an international market which can help it make huge profits. However, it is necessary that the significant challenges which Amazon Inc. face in the competitive business arena should be acknowledged that exist while pursuing greater market share gains from its competitors like Wal-Mart and Target. Different challenges of this online retail company have been elaborated in detail in the following manner:
Loss of Competitive Position and Threat to Existing Market Share
Though Amazon Inc. appears to own a larger market share of the online retail industry relative to its competitors yet it is no longer valued by customers as before. The reason for this is that another retail business, Alibaba is acquiring much of the market share which initially Amazon Inc. possessed before. Observation from stock market investors also reads that Amazon Inc. is not performing well and ceases to create any shareholder value in form of capital and dividend gains when compared to its competitors.
All these issues stem from the challenges which Amazon Inc. faces in the global marketplace. In Germany, Amazon’s employees went on a strike because it was felt that they are being paid less salaries and wages than what Amazon’s competitors pay to their employees designated at the same position. Due to this social problem, Amazon’s business operations were disrupted and the company had to absorb losses from discontinuing operational activities .
In other words, it can be found easily that Alibaba (with an annual growth of thirty three percent) has become an inevitable threat for Amazon Inc. to grow and expand operational activities in the worldwide business arena. There is a challenge for Amazon Inc. to only surpass Alibaba but its other competitors as well if it wishes to keep growing and acquire more market share in the global online retail industry.
Adoptability to the International Business Environment for Growth
Financial performance analysis will reveal that during the third quarter of 2014, nearly forty percent of the total sales revenue for Amazon Inc. was generated from geographical locations such as Japan, United Kingdom and Germany. Despite this revenue generation capacity from these countries and based on its own business insights, Amazon Inc. is investing heavily in emerging and potentially attractive marketplaces like China and India. With such an investment activity in progress, there arises a question of international growth.
In the third quarter for the year 2014, Amazon posted relatively disappointing year-on-year revenue growth in the international market of thirteen percent compared to twenty percent during the same period in 2013. This makes Amazon’s growth in the international market questionable to almost every stakeholder that why the growth declined in 2014 though much of the revenue was generated from developed markets. In view of this, international market growth (by revenue) seems to be a biggest challenge to Amazon Inc. for the year 2015 .
At an international level, there is a challenge for Amazon Inc. to adopt the business environment prevailing in the local and global marketplace. Of equal importance is the ability to adopt business and economic cultures in different geographical areas where Amazon Inc. operates. Amazon Inc. must customise itself to the local environment particularly and must examine what strategies in a specific market or a country work and which strategies do not. For instance, consider the Indian market. In such a business environment, fewer than twelve percent Indian citizens possess debit or credit cards. Therefore, Amazon Inc. has to adopt a business strategy concerning payment receipts related to "Cash on Delivery" model.
Pressures from the Competitive Environment
Because of a great and positive customer experience and electronic commerce business model which Amazon Inc. follows as an internet-based retailer, it has managed to accumulate significant market share in the related industry. However, it is important to keep in mind that competitors, like eBay, Wal-Mart and Costco etc, are after the same customer base and will continuously fight to capture more market share in the same industry in which Amazon Inc. operates.
In view of this industry full of intense competition from high profile business rivals, it is of childish nature to think that these competitors might refrain from competing with Amazon. Wal-Mart is a good practical example because it is making extensive research and putting in more time as well as efforts to implement “same-day delivery” model in its shipment operations which will also include products like groceries. If Wal-Mart manages to effectively match the services it offers to those provided by Amazon Inc, Wal-Mart will gain a competitive edge while e-commerce activities keep evolving given the technological advancement and existing scale. Also, many competitors like Target, pharmacies, grocery stores, and other retailers are also making painstaking efforts for finding new and innovative ways to add convenience to their services and provide same-day delivery and in-store pickup of online orders.
Maintenance of Low Price and Low Margin Business Strategy
For analysis under this section, one must bear in mind that Amazon follows low margin model for providing low cost products to its customers with quick shipment and delivery service. As discussed earlier, the revenue generating growth for Amazon Inc. is slowing down where most of the promising markets in which it operates are no longer potentially lucrative as they were before. This in itself is a major business challenge for Amazon Inc. for 2015 and beyond, as pointed in one of the previous sections in this research paper.
As Amazon Inc. has been competing intensely with companies like Wal-Mart and Target (as brick-and-mortar discounters) as well as eBay (as one of the online retailers), it has managed to attract huge customer base with low price of its products and offerings. Of prime importance is to remember that Amazon and its competitors are operating in an industry where product pricing is a major source main advantage and competing on this basis may not translate into generation of huge business income and stakeholder value.
There is another major challenge for Amazon Inc. which worries its management is that existing business rivals may match their service offerings and delivery speed as that of Amazon Inc. which may lead to a price war in the industry. While Amazon emphasises more on capturing more market share instead of generating profits, any threat by price wars has a potential to harm the bottom-line of Amazon’s financial statements. Significantly, with a capacity of generating higher incomes from operations, competitors (Costco, Wal-Mart and Target etc) are able to fight back by offering lower product prices as a resistance against Amazon's existing business growth.
Challenges in Product Shipment by Logistics Companies
Though competition is intense yet Amazon Inc. has the ability to outperform its competitors by incredible business model, strategy and operational efficiency necessary for online retail dominance. Additionally, shipping of products to customers remains a challenge every year for this company under review.
This can be seen from a practical perspective i.e. shipment of products on holidays. During that time when customers place orders for their products, which they intend to give to their loved ones as gifts, they may receive them after one business day or two though Amazon offers same day delivery, particularly in the United States. This delay in delivery time-frame by one or two days might not matter but since holidays contains deadlines to give gifts to each other, Amazon Inc. may suffer from huge losses if it misses those gift giving deadlines. In this situation, no one will blame the shipment companies too Amazon Inc. (FedEx or UPS). Instead, it is Amazon’s responsibility to make sure that their shipment partner lives up to those deadline expectations.
Prime shipping makes a promise to deliver products sent by Amazon Inc. in two business days which is attracting more customers to Amazon. However, Amazon Inc. is heavily dependent on these shipment companies to make long-term profits. This has forced Amazon Inc. to pay more on each shipment to these companies (including Prime, FedEx and UPS). This activity has also forced Amazon Inc. to increase shipment prices which may damage the customer base if it is perceived negatively.
Opportunities Which Amazon Inc. Could Exploit
After analysing the business model, strategies and various challenges which Amazon Inc. has been coming across, it is identified that the major opportunity which Amazon Inc. has is to start its own shipping activity. Though it is not related to its business operations yet starting a shipment activity itself will give Amazon Inc. a greater opportunity to adopt “backward integration” model and keep its shipment promises. This will also support the company to not miss any deadlines during time-sensitive occasions like holidays and birthdays etc. This shipment activity will modify the capital model but will drastically provide huge returns on investment.
There is a lucrative opportunity to access new marketplaces and make investments from where the major revenue gets generated. Adoption of international business environment is also of prime and critical importance for 2015 and beyond. Amazon Inc. as an opportunity to invest more in expanding its business capacity and distribution infrastructure to meet existing and new demands backed by a seamless experience.
Third opportunity to remain competitive for Amazon Inc to generate more sales revenue and profits depending on its business model is to build warehouse across different geographical locations. This plan should be backed by Amazon Inc. with an opportunity to ship and deliver its products on its own. This plan, if put into action as a competitive advantage, will increase the number of orders placed while Amazon Inc. could keep its promise of shipping and delivering products cheaply and quickly.
After carefully investing into business operations of Amazon Inc, one may conclude that the company, as a leader in online retail industry, operate based on business-to-business and business-to-consumer model. Its strategy is to provide, make shipment and deliver products at a lowest cost possible in a quick manner. Various challenges are faced by Amazon Inc. in which the pricing policy and logistics management are of critical importance. However, if Amazon Inc. makes shipment of products itself, it can dramatically improve the bottom-line of its financial statements.
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