Amazon Company - External and Internal Analysis of Strategic Capabilities - Example

Strategic Management Student’s Name Instructor’s Name Course Date Strategic Management 1. Executive Summary Strategic choices of Amazon Company fit well with its vision and objectives which has led to its growth and has enabled it to be the world’s market leader in the online retail industry. Factors such as intense competition, threat of new substitute, economic recessions and legal restrictions affects the operations of the company. Amazon utilizes both differentiation strategy and cost leadership strategy in order to achieve its competitive advantage. It offers low cost for its products and offer innovative and high quality products to the customers. The company segment its market according to age, lifestyle and income parameters which has yield a number of benefits. Through its strategies, Amazon has been able to manage its threats and capitalize its strengths. 2. Corporate Objectives Strategic analysis of any business involves the understanding of environment of an organisation in order to enhance efficiency and effectiveness through the improvement of organisation’s capacity to deploy its resources (Thompson, 2001). When operating a business, it is imperative to make the business successful through a number of objectives. Amazon is considered the world’s leading online retail company. Amazon Company business strategy is unique from other companies. The company has developed products that are unique and valued. The company offer products and services of high quality to the customers and maintains an image surrounded by innovation and creativity (Thompson, 2001). Amazon Company has enabled customer increase their knowledge through the provision of innovative devices such as the Kindle. The mission of the company is to offer unique, low costs as well as innovative products that empower and offer value to the customers. One objective of the company is to build a place where customers will be able to find anything they want to buy online. Corporate strategy of Amazon also is founded upon the lower costs of its products and excellent customer services. Although competition in the online retail industry has increased dramatically, Amazon has remained the market leader with high market penetration (Thompson, 2001). The corporate strategy of Amazon ensures that the company is at the leading position. 3. External Analysis 3.1. Macroeconomic Analysis PESTLE Analysis Political Issues Amazon Company serves more than 140 countries around the world. In some countries like China, Amazon has been affected by strict censorship policies (Suresh et al. 2001). Operation in these countries is hard as a result of the policies related to online purchase. In addition, low taxes in some cities like Boston have favoured the operation of the company and have led to its growth and expansion. Economic Issues Economic conditions in the EU countries as well as the United Sates is not so good and the buyer purchasing power has gone down as a result of economic recessions. Many people are reluctant to purchase Amazon products due to the fear of economic uncertainty (Suresh et al. 2001). Nevertheless, in some countries like India and China, purchasing power of the people is increasing which is favourable to the company. There is economical internet boom in many countries which has benefited the country over the years. Social Issues The increasing social networking has boosted online purchases which has created opportunities for Amazon to increase market share. However, due to ethical, religious and cultural factors, many people in some countries avoid purchasing products on the internet owing to factors like safety, uncertainty and habit. In addition, many people prefer to purchase products from traditional stores instead of the online store since they are uncomfortable making online transactions (Suresh et al. 2001). Technological Issues It is very essential for Amazon to keep up with technological advancement as this represents the main success factor for the company (Brad and Debra, 2009). People from countries like the United States are used to operating Smart Phones and thus, Amazon should offer Mobile Phone applications to serve its customers well. Technological advancement has brought about security issues (Brad and Debra, 2009). Therefore Amazon is pressured to equip itself with advanced technology that protects the customers’ online information. Environmental Issues Over the years, there has increased the concern among the customers about the environmental effects of the companies’ products and services. In addition, in many countries there are a number of environmental laws that apply to companies in different industries (Brad and Debra, 2009). Amazon has over the years strived to produce products that are environmentally friendly and has offered environmental information to customers to ensure their products have minimum effects in the environment. Legal Issues Many countries have strict legal laws governing different industries. It is very hard for Amazon to follow these rules that is used to operate in countries like United States and EU (Brad and Debra, 2009). These legal rules and regulations may affect the operation of Amazon in some countries. 3.2. Competitive Analysis Porter’s Five Forces Analysis Bargaining Power of Suppliers The Bargaining power of buyers is high because customers have many choices to select from their e-commerce services. Amazon Company lacks a physical store which enables them to offer low prices to the customers (Violina and Surech, 2000). The company has managed the power of buyers to its advantage and ensured that customers choose their products rather than the competitors’. Bargaining Power of the Suppliers The power of suppliers is relatively high since Amazon Company does not have the capability to compete with the suppliers. However, the suppliers are very committed to the company (Violina and Surech, 2000). Existing Rivalry There is intense competition in the online retail industry. Amazon’s competitors can be divided into different categories. First category is physical competitors such as vendors and publishers; second is online companies such as e-commerce; third is media companies, web portals and social networks (Violina and Surech, 2000). The company’s direct competitors are eBay, Yahoo and Noble.com. Threat of new entrants The threat of new entrance is very high although there are a number of entry barriers including economy of scale (Violina and Surech, 2000). However, new entrants can reduce the entry barriers by being innovate and creative in offering their products and services. Threat of Substitute The threat of substitute in the online retail industry is very high. There are numerous substitutes to Amazon’s products and services (Violina and Surech, 2000). For instance, some competitors offer their products through both online and physical stores. There are many substitutes as there are many physical retailer companies offering the same products as Amazon. 4. Internal Analysis Strategic Capabilities 4.1. Organisational Resources and Competences Competitive advantage of a business is dependent on an organisation’s internal characteristics. If an organisation retains and takes advantage of valuable, rare, inimitable as well as non-substitutable capabilities, there is a high chance of attaining competitive advantage and thereby long-term success (Pearlson et al. 2015). Capabilities entail both competencies and resources. Competencies can be defined as the skills and expertise that allow an organisation to be competitive while resources are the physical and mental assets used by organisations. Strategic capabilities are major components that enable a company to remain financially viable and to continue growing despite intense competition. Many factors can contribute to strategic capabilities (Ross and Camp, 2001). Resources like capital, physical properties and patents offer ability for companies to develop and employee strategies. Additional factors of strategic capabilities include organisational structure, technological and human resources (Ross and Camp, 2001). In addition, pricing is another element of strategic capability. In Amazon Company, elements of strategic capabilities include manipulation of technology, human resources, patent and financial capabilities. In addition, the company is able to manipulate its pricing strategies to not only retain customers but also to maximize profits in order to enjoy strategic competitive advantage. Basic resources used by Amazon include human resources, financial resources and organisational resources (Ross and Camp, 2001). However, there are some resources that the company possess that are valuable, rare, inimitable and non-substitutable; they include reputational resources, organisational structure and innovation resources. 4.2. Business Functions of Amazon There are three major functions of Amazon Company; operations, finance and marketing. Operation function is one of the key functions of the company and is concerned with production of products and services (Hurwitz, 2011). Amazon is known to development innovative products and services that serve the need of the market. The finance function deals with the acquiring of financial resources and allocating them effectively to different segments of the company. Finance also deals with budgeting. Amazon has a rigid finance department that perform critical tasks to ensure the growth of the company. This department tracks how organisation is doing in terms of finance capabilities. Marketing function entails the promotion of products and services to create awareness among the consumers (Hurwitz, 2011). Marketing function also ensures that the products of the company meet the need of the customers. There are many marketing strategies used by Amazon. For instance, the company uses advisements, sponsorship of charities and direct marketing in reaching the customers. 5. Basic of Competitive Strategy 5.1. Key Market Segments The company utilize demographic segmentation with age as the main parameter. The fundamental target segments of the company are young people aged 16-35 years. This age bracket includes individuals who use the internet and are ready to purchase products online without fear or uncertainty (Dafermos, 2003). Another segmentation strategy used by Amazon is Psychographic. This kind of segmentation involves lifestyle of individual customers. It also entails the customer’s activities together with their corresponding interests and opinions. It classifies individuals according to the way they spend their leisure. Amazon looks at the purchase behavior of people (Dafermos, 2003). In addition, Amazon targets the upper and Middle class individuals who are inclined to use E-commerce or prefer using it and are comfortable doing shopping online. Amazon products are considered to having average prices that only the middle and upper class can afford. In addition, a number of its customers are business people and professionals who lack time to visit a physical store and are inclined to shop online (Dafermos, 2003). 5.2. Analysis of Business Strategy Strategic positioning of Amazon Company can be done using Porters generic strategies. Porters have presented three generic strategies that can be used by companies to create competitive advantage (Ely and Stimpert, 2004). These three generic strategies include lost leadership, differentiation and market focus. Companies use cost leadership strategy in order to be the company in the industry that offer the lowest cost for its products and services. With the differentiation strategy, companies strive to differentiate its products and services by offering better quality products and better services at premium prices. On the other hand, companies can use market focus strategy by putting their focus on the niche in the market and providing specialized products or services for this niche (Ely and Stimpert, 2004). Amazon Company uses the cost leadership as the core strategy in its operations. Amazon Company has a huge warehousing facilities as well as unique capabilities that are able to offer it physical economies of scale. Economies of scale has given the company cost advantages (Ely and Stimpert, 2004). Since Amazon is an online company, it is forced to compete on price. However, in its services, amazon makes use of differentiation strategy. The first part of differentiation strategy use is in its development and provision of 100% innovative products and services. The close focus on innovation by the company is attributed to the need to improve its products and services in order for them to be appealing to the customers (Ely and Stimpert, 2004). Another component of differentiation strategy in Amazon is its focus on customer service. The company is customer-focussed and has established effective customer service in order to retain and attract new customers. We can say that Amazon strategy is a hybrid of differentiation and cost leadership strategies. 6. Strategic Choice As seen earlier, the company is faced with intense competition and there is high threat of substitute (Sandeep, 2002). Therefore, in order for the company to remain the world’s leading online retail company, it should come up with ways to tackle competition, substitution and other penetration challenges. The Ansoff strategy that can be employed by Amazon is diversification. There are many ways that Amazon Company can diversify. One way of doing so is to offer an extension of the products and services the company is offering. Diversification can also be done through brand extension (Thomson, 2001). For instance, it can extend its brand by forming new companies operating under different name within a group structure. However, brand extension has a number of risks but pays off in the long run. Diversification strategy can pay off if it is planned carefully (Wu, 2010). Diversification strategy can be used by Amazon to expand its operations by introducing new markets, products and services to the existing business process. Diversification will enable the company fight the intense competition and grow strategically. The appropriate diversification strategy to be employed by Amazon is concentric type. Use of this diversification strategy by Amazon Company will enable it to achieve strategic fit which is fundamental in achieving synergy. Synergy can be termed as the ability of different parts of a business entity to achieve enhanced effectiveness when efforts of independent parts are summed (Thompson, 2001). Diversification may be either external or internal. Effective external diversification process by be through mergers and acquisition. 7. Strategy Evaluation Ansoff’s Matrix can be used to evaluate feasibility, acceptability and suitability of the diversification strategy (Wu, 2010). Measuring the effectiveness and success of an organisational strategy is very important. As mentioned earlier, diversification will be an effective strategy that can be used by Amazon Company to boost its competitive advantage and brand (Sandeep, 2002). Diversification strategy can be evaluated by a model containing three key success criteria: Acceptability, feasibility and suitability. Suitability deals with the rationale of the strategy. It addresses the issue of whether the strategy would address issues underlined by a company. Suitability analysis evaluates viability of a strategy given the external environmental issues (Wu, 2010). Diversification strategy will be an effective strategy for Amazon especially when ranked with other potential strategies since it is able to neutralize the competition in the industry and will enable the company grow. Feasibility on the other hand deals with the resources required to institute the strategy (Wu, 2010). These resources may include information, people, capital and time. Amazon has the necessary resources to implement diversification strategy in their operations. In addition, the company has unique internal capabilities that will enable diversification to be effective and successful. Also, acceptability involves the expectations of the stakeholders in relation to expected performance outcomes (Wu, 2010). It also focuses on the financial aspect of the organisation. Diversification strategy has the potential to bring about good returns to the stakeholders and probability of failure of the strategy is very low. 8. Conclusion and Recommendation In conclusion, Amazon is the world’s market leader in the online retail industry. There are many external and internal factors affecting its success as seen from the porter’s five forces analysis and the Pestle Analysis. For instance, the company is under strict rules and regulation in some countries that affects its success. Also, technological advancement has put pressure on the company and has increased the need to ensure security of customers’ online information. The company is faced with intense competition from companies such as Yahoo, eBay and Nobl.com. Amazon’s products and services can be substituted with other products and services offered by the traditional stores. Due to competition in the industry coupled with the substitutability of its products and services, the company should come up with a strategy that will enable overcome these challenges. The company utilizes hybrid strategy made up of differentiation and cost leadership strategy. Through these strategies, the company has capitalizes its strengths and has taken advantage of the opportunities offered in the online retail industry. From the essay, the main weakness of the company in comparison with the competitors is lack of a physical store that would serve a larger market and customers who prefer to buy their products in the physical stores. From its strategic choices, Amazon Company is managing its threats successfully which has led to its growth and success over the years. The company’s vision and its strategic choices fit perfectly and this is one reason that has enabled the company attain its goals and objectives. References Brad, S and Debra, S 2009, Amazon top seller secrets insider tips from Amazon's most successful sellers, New York, AMACOM. Dafermos, G 2003, Blogging the Market: How Weblogs are Turning Corporate Machines into Real Conversations. Retrieved 25th April 2016 from http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.85.7443&rep=rep1&type=pdf Ely, K and Stimpert, J 2004, The Applicability of Porter's Generic Strategies in the Digital Age: Assumptions, Conjectures, and Suggestions, Journal of Management, Vol. 30, No. 5, p. 569-589. Hurwitz, J 2011, Smart or lucky? how technology leaders turn chance into success, San Francisco, Jossey-Bass. Pearlson, Keri E., Carol S. Saunders, and Dennis F 2015, Managing and using information systems: a strategic approach, Hoboken, NJ., John Wiley & Sons, Inc,. Ross, A and Camp, Z 2001, Value Creation in E-business, Strategic Management Journal, Vol. 22, No. 6/7, p. 493-520. Sandeep, K 2002, Amazon.com – A Business History, Retrieved 25th April, 2016 from http://paginas.fe.up.pt/ipc/suporte/varios/amazon_final.pdf Suresh, K., Rajgopal, Shivaram, and Venkatachalam, M 2001, From Surfing to Buying: The Role of Online Customer Experience in Acquiring and Converting Web Traffic, Retrieved 25th April 2016 from http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.200.5179&rep=rep1&type=pdf Thompson, J 2001, Understanding corporate strategy, London, Thompson Learning. Violina, R and Surech, K 2000, “Building Reputation stocks through Strategic Action Flows: Lessons from Amazon.com and its Competitors In Internet Retailing”, SSRN Electronic Journal, DOI: 10.2139/ssrn.242989 Wu, T 2010, Strategic Choice: Johnson and Scholes Suitability, Feasibility and Acceptability Model, Learning Centre, Retrieved 25th April 2016 from http://www.tolobranca.nl/wp-content/uploads/2015/08/SFA-Matrix-learning_strategic_choice.pdf Read More