Good Amazon In 2014 Case Study Example
Whether Amazon’s diversification efforts have gone too far or have effectively positioned the company for the unpredictable future is a debatable question. On the one hand, considering the volatile nature of modern global economy and business environment, diversification is a smart move for giant corporations, as it makes them more flexible and less dependent on a single business. In 2014, Amazon was successfully competing in a variety of industries: e-commerce, online advertising, electronic mobile devices, wholesale and distribution, and online broadcasting (Gupta, & Rodriguez, 2014). Should one business unit fail due to unfavorable influence of external factors like shifts in demand or economic downturns, Amazon can always sell it and focus on more profitable businesses, or support the staggering branch through allocation of financial resources generated by well-performing businesses.
On the other hand, when a company diversifies into a large number of industries, it becomes hard to control and manage them properly, which may lead to poor decision making and lack of effective industry-specific strategic choices (Peng, 2014). Moreover, maintaining several major business units requires massive investments that negatively affect the company’s profitability. Amazon’s net income and operating margin were highly unstable for over a decade. For instance, in 2012, the company’s net income was in the negative, and in the first quarter of 2014 totaled only $108 million, with total sales of $15.7 billion, and the operating margin equaled only 2.6% (Gupta, & Rodriguez, 2014).
Therefore, while the company’s investments may have positioned Amazon for the future, they need to be controlled extremely carefully, and managed with respect to corresponding business units’ industries. Next section of the paper focuses on recommendations for Amazon on how to approach future strategic management with respect to the scope of company’s diversification.
Recommendations and conclusions
In my opinion, recent financial performance of Amazon is a major cause for concern for the company. Therefore, my first recommendation will touch on improvement of Amazon’s profitability.
Offering low prices and operating at low margins have always been the key factors that drove Amazon’s revenues to extreme levels (Dennis, & Nonnenmann, 2014). Yet, the company fails to demonstrate healthy profitability. Matthew Yglesias, a popular American economics and politics writer, even made a joke with regard to this strategy: “Amazon, as best I can tell, is a charitable organization being run by elements of the investment community for the benefit of consumers” (Wei, 2013). It is true that Amazon constantly focuses on the future by immediately re-investing most of its profits into the company, and its investors are generally on board with this long-term strategy, even though it implicates significantly lower dividends. However, investment appetites of Amazon are increasing with its further diversification into businesses that require huge capital inflows, such as the smartphones market. In order to attract new investors, the company must improve its profitability levels. This can be achieved by implementing minor increase in prices. Since Amazon mostly operates in low-margin low-rice industries, and possesses massive scale, a 1% to 5% increase in prices will lead to significant inflow of additional revenue. This additional revenue can be allocated directly to profits, since investment demands of Amazon are being met even at current prices. A 1% increase in prices can result in $745 million of additional revenue, 3% - in $2.234 billion, and 5% - in $3.723 billion. Moreover, such a minor increase in prices will most likely remain unnoticed by most consumers, since the original prices are relatively small (Dennis, & Nonnenmann, 2014).
The second recommendation concerns the handling of Amazon’s portfolio of businesses. First, to achieve maximum performance enhancement through diversification, Amazon should focus on three major areas: leverage core competencies and applying them to new business units, realize economies of scope, and develop internal governance skills. While the first two aspects are reflected in Amazon’s strategy, development of internal governance skills may become the factor that will drive the company’s performance to a new level. Corporations that actively diversify their businesses often fail due to lack of flexibility and a highly centralized decision-making process (Hill, & McShane, 2008). Some of the industries that Amazon entered through diversification are not related to one another. Consequently, they have their own specifics that are crucial for success in those particular industries. Managers of such business units must be perfectly aware of these specifics, and provided with enough freedom to implement those specifics in the business unit’s strategy. This requires a certain degree of decentralization within a corporation, without losing the benefits of economies of scale and the synergy of key competencies. Additionally, when a company enters a new industry, the human resources department must find a perfect match for that new branch manager’s role. The new manager must be an experienced professional, perfectly familiar with the industry, and able of adjusting to specifics of a big corporation.
Therefore, within the context of the modern unpredictable business environment, Amazon’s long-term investments seem a smart move. However, Amazon must recognize its existing problems with low profitability and the need for more corporate flexibility to succeed in the newly entered businesses. A minor increase in prices, a reasonable level of decentralization, and effective sourcing and hiring of talented leaders should resolve these issues, making Amazon’s investments a solid backbone of the company for the future.
Dennis, B., & Nonnenmann, S. (2014). Amazon: is profitability a possibility? Expert Journal of Business and Management, 2(1), 9-13.
Gupta, S., & Rodriguez, M. L. (2014). Amazon in 2014. Boston, MA: Harvard Business School.
Hill, C. W., & McShane, S. L. (2008). Principles of management. New York, NY: McGraw-Hill/Irwin.
Peng, M. W. (2014). Global Business (3rd ed.). Mason, OH: South-Western, Cengage Learning.
Wei, E. (2013, Oct. 26). Amazon and the "profitless business model" fallacy. Remains of the Day. Retrieved from http://www.eugenewei.com/blog/2013/10/25/amazon-and-the-profitless-business-modelnarrative