AMAZON

CASE
STUDY
Submitted by
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1. Describe Amazon.com. What kind of company is Amazon.com? What is Amazon’s
business model?
Amazon.com:
Amazon (Amazon.com) is the world’s largest online retailer and a prominent cloud
services provider. The company was originally a book seller but has expanded to sell a wide
variety of consumer goods and digital media as well as its own electronic devices, such as the
Kindle e-book reader, Kindle Fire tablet and Fire TV, a streaming media adapter.

Amazon Web Services(AWS) is a comprehensive, evolving cloud computing platform.

The first AWS offerings were launched in 2006 to provide online services for websites and
client-side applications. Amazon’s Elastic Compute Cloud (EC2) and Simple Storage Service
(S3) are the backbone of the company’s large and growing collection of Web services.

It was founded on July 5, 1994, by Jeff Bezos and is based in Seattle, Washington. Bezos
is said to have browsed a dictionary for a word beginning with “A” for the value of alphabetic
placement. He selected the name Amazon because it was “exotic and different” and as a
reference to his plan for the company’s size to reflect that of the Amazon River, one of the
largest rivers in the world.

About The Company:

Amazon is guided by four principles: customer obsession rather than competitor focus,
passion for invention, commitment to operational excellence, and long-term thinking.
Amazonians are smart, passionate builders with different backgrounds and goals, who share a
common desire to always be learning and inventing on behalf of their customers.

Supporting small business: Amazon is committed to helping small businesses and

entrepreneurs grow sales and reach new customers. Today, more than 1.9 million businesses,
content creators and developers in the U.S. use Amazon products and services to follow their
dreams and reach customers.
 Sustainability: Amazon has a history of developing innovative programs to deliver on
their commitment to sustainability - from solar and wind farms, to packaging innovations like
Ship in Own Container and Frustration Free Packaging. Shipment Zero is their vision to make all
Amazon shipments net zero carbon, with 50 percent of all shipments net zero by 2030.

Subsidiaries: Amazon owns over 40 subsidiaries, including Zappos, Shopbop,

Diapers.com, Kiva Systems (now Amazon Robotics), Audible, Goodreads, Teachstreet and
IMDb.

Amazon’s Business Model:

Often touted as the largest online retailer in the world, Amazon operates a business model
with many moving parts. First and foremost, the company sells goods directly. A percentage of
products are offered to buyers through Amazon's online storefront with a small markup, and
inventory is kept in the company's large network of warehouses. Most consumers visit the
company's site assuming its products are less expensive and readily available for purchase and
shipping.

In addition to direct sales, Amazon provides a platform for other retailers to sell products
to buyers. Products sold through Amazon's partner retailers are often less common items or those
with a higher purchase price, allowing Amazon to avoid holding slow-moving inventory that
could dilute profit. While Amazon does not assess a fee for its retailer partners to list items for
sale, the company does retain a portion of the sales price as commission.

Amazon also maintains a subscription-based business model through its Amazon Prime
service, as well as a small electronics product line. Under a Prime account, customers pay an
annual fee to secure free two-day or same-day shipping on eligible items and have access to
streaming media, such as digital music or movies. Amazon also generates revenue from selling
its e-reader, the Kindle, and the e-book and mobile application purchases offered to Kindle
owners.
2. Assess Amazon’s resources and capabilities using the VRIO framework. Can Amazon
gain and sustain a competitive advantage? Why or why not?

VRIO Analysis:

The VRIO framework is a tool utilized internally by firms to analyze their resources and
capabilities to determine the competitive advantage implications- temporary competitive
advantage, sustainable competitive advantage, competitive disadvantage, or competitive parity.
The four components of measure that contribute to the analysis are:

· Value. Are the resource and/or capability valuable in enabling the firm’s ability to
leverage opportunities and defend against threats?

· Rare. How easily acquired and readily available is the resource and/or capability to the
industry or other firms?

· Imitability. Could substitutes and imitations be easily implemented for the resource
and/or capability? If so, how expensive would it be to emulate the resource and/or capability?
 · Exploitation. Is the firm properly realizing and utilizing the resource and/or capability to
its most ideal state or maximized or optimized potential?

Resources/capabilities Valuable Rare Inimitable Exploited Implication

Brand image/equity Yes Yes Yes Yes Competitive

advantage

customer base Yes Yes No Yes Temporary

advantage

global presence Yes Yes No Yes Temporary

advantage

customer loyalty Yes Yes No Yes Temporary

advantage

Technology Yes Yes No Yes Temporary

advantage

Product range Yes Yes Yes Yes Competitive

advantage

Can Amazon gain and sustain a competitive advantage?

In this era of heavy competition, brands cannot be successful without having a strong business
strategy and more than one source of sustainable competitive advantage. At the centre of
Amazon’s business strategy is customer convenience. The brand has seen global success by
being the most customer focused e-commerce brand. Being successful in the 21st century
requires maintaining a continuous focus on customers’ choices and demands and being first to
respond to it. Amazon sells a very large range of products from its website whose number ranges
in hundreds of millions. In this way, it caters to a very large range of customers’ needs
worldwide. Accessibility and affordability are also two notable aspects of its business strategy.
Being a larger e-retailer, it is able to create price pressure on its suppliers and pass this benefit
to its customers. Technology is also a very important part of its business strategy in both
segments including e-commerce and Amazon web services. AWS is a leading cloud service
provider. On its e-retail platform as well, the brand maintains heavy focus on creating a
competitive advantage by providing higher level of convenience to its customers. It continues to
invest in AI and digital technology for a superior shopping experience. Its investment in research
and development is among the highest in the technology industry. This is however, essential to
sustain its growth rate since the competitors have also grown aggressive in terms of technology
and marketing. The brand uses several channels to attract customers. Its introduction of Amazon
prime has also proved to be highly effective in terms of attraction and retention of customers.
The kind of growth that Amazon has achieved within a short period was not possible without
having a few sources of competitive advantage. The most important sources of Amazon’s
competitive advantage are:
· Innovative technology
· largest product range
· customer service
· pricing (free shipping)
· popularity and customer loyalty
While many of these sources create sustainable advantage for the brand, some of them are also
sources of temporary advantage that Amazon is trying to strengthen by investing in R&D.

Why or why not?

Competitive Disadvantage:

Amazon does not seem to fail at much of what they invest or innovate as the VRIO shows. They
have proven success with many of their resources and with capabilities of their products. The
item that has been proven as a failure for Amazon was the Fire Smartphone. Where Amazon
usually wows with their innovative and creativity, the Fire phone fell flat. This was labelled as a
competitive disadvantage due to the waste of time, money, and effort to produce an item that was
not valuable, rare, inimitable, or even exploited to its full potential.
Competitive Parity:
Competitive Parity refers to common items that are valuable, however, not rare and easily
substitutable. Amazon must not underestimate these items as they still generate revenue streams
and any revenue is better than no revenue, even if it is not sustainable in the long-term. Amazon
Supply, Amazon’s New York City brick-and-mortar, Video-on-demand, Brilliance Audio, Dry
grocery delivery, European warehouses, and “Search-inside-the-book” feature are all common
capabilities that many competitors and other retailers have been using in the industry. Though
these capabilities are easily imitated by other competitors, if Amazon were to suddenly lose these
capabilities, the business would suffer in the short-term.

Temporary Advantage:
Amazon’s strength has been in their early adoption and acquisitions of retailers and concepts that
could quickly and seamlessly be integrated into their existing business model. These resources
and capabilities are viewed as temporary advantages because as they continue to succeed and
become mainstream, it is only a matter of time before competitors follow suit. Items like Instant
Video, X-Ray for movies, and its various acquisitions of smaller e-retailers like Pets.com and
partnerships with industry giants like Sotheby’s to grow their business is definitely a competitive
advantage through first-to-market benefits.

Sustainable Advantage:

The most sustainable competitive advantage for Amazon comes from their highly innovative and
industry leading items like being one of 160 entities being accredited through the ICANN,
controlling the publishing rights to Kindle, which feeds and doubles their revenue stream with
their intellectual property and hardware, like the services of Amazon Web Services for cloud
computing and IaaS . Sustainable competitive advantage for Amazon has been possible with
their propensity for innovation, their reputation through customer experience and service, and
their industry leading corporate leadership and visions.

3. What is Amazon’s core competency?

Developing core competencies enables organizations to gain competitive advantage with
the express benefit of increasing sales and profits. Companies achieve this through innovation in
developing products and services. While seeking ways to fill niche target markets, deliver
services quickly and efficiently, and increase product quality, companies are bringing consumers
better products and better values. This is something that customers recognize and pay back with
loyalty. Another benefit of developing core competencies is that it helps organizations establish
the essence of their brand. If a company’s core competency lies in their outstanding customer
service, then that is also an excellent attribute that can be used for marketing their brand.

Amazon’s goal of being the “most customer-centric company on earth” embodies the
core competency that gives them competitive advantage over numerous other retailers.
Companies should be aware that just because their core competency has brought them success
once, they may not always have the advantage when markets and consumers change. They must
be able to change and adapt by developing new, updated core competencies that can help them
retain their edge.

The sustainable competitive advantages of Amazon are derived from the core
competencies of the business organization. In this VRIO analysis case, there are four resources
or capabilities that form the foundation of long-term competitive advantages. For instance, the
Amazon.com brand has high equity in the global market. Through this brand, the company
attracts customers to its current and emerging products. This brand equity is valuable and rare in
the market. This high brand equity is also extremely difficult to imitate, especially in markets
where the company already has a strong presence.

Amazon maximizes the benefits of this core competency by organizing its business
around it and by using the brand for various products.
 Aside from such competencies, the VRIO table adds that artificial intelligence
capabilities are another core competency and source of sustainable competitive advantage for
Amazon.com Inc. The corporation’s AI capabilities, inclusive of Alexa, provide product
enhancement and improved customer experience, thereby making the company a desirable
platform for customers. This condition strengthens the company’s strategic position as a major
technology business and influencer in the global market. For a company to maintain a significant
competitive advantage and demonstrate capabilities, a transformation regarding the value chain
is needed. Amazon found the need to formulate a management plan for both the physical outlets
of supply and the online virtual web platform. The introduction of online shopping by Amazon
greatly transformed the retail industry a lot. The company continues to innovate with this way of
thinking, providing multitudes of platforms that allow sellers, content creators, and more to
distribute products and services under the Amazon umbrella. Here are just a few examples:

Twitch – Video Game Streaming

Twitch is a massive force in the video game industry and streaming in general. One of the
most popular broadcasters is a 26 year old who goes by the name Ninja, and makes an estimated
$350,000 each month from the platform. He was recently joined by popular rapper Drake during
a Fortnite game, smashing Twitch’s record and resulting in 628,000 concurrent streams. Twitch
is growing in popularity fast and will become a platform that many aspiring gamers build their
careers on.

Audible – Audiobooks

In a totally different market, Amazon has also become the go-to platform. According to
Observer, 44% of audiobooks are purchased on Audible.com, which Amazon owns. Audiobooks
are growing in popularity, increasing sales by 20% in 2017. Audible is not only the place people
go to listen to audiobooks, its where many independent authors sell their books, and depend on
the platform for their careers as well.

Amazon Web Services (AWS) – Cloud Hosting

 Amazon made a big early bet with its cloud computing network, Amazon Web Services.
AWS now hosts over 33% of the cloud and is Amazon’s fastest growing business, growing
252% in the past three years. While competitors such as Google’s Cloud service and Microsoft
Azure are growing too, Amazon has a big lead. Amazon has positioned itself so that it hosts
much of the world’s internet. Not only do independent streamers, authors, and small businesses
depend on Amazon’s platforms, huge organizations such as Netflix, Spotify, Airbnb, Comcast
and more host platforms using Amazon Web Services.

Whole Foods – Supermarket Chain

And lastly, while Amazon’s dominance on the web is clear, it is worth noting that the
company is making strategic acquisitions to establish themselves offline too. With its purchase of
Whole Foods in 2017, the company now sells the food you eat as well. Amazon’s vision is to
create closed, interwoven ecosystems of buying and selling. Many people now and in the future
will buy most products on Amazon.com, buy groceries from Whole Foods, host their website on
AWS, and use Amazon’s Ecommerce platform for their business. Amazon understands the
virtuous cycle that occurs as more and more commerce platforms are interconnected and owned
by the organization.

4. How is Amazon using its core competency in its diversification efforts? Amazon
continues to spend billions on seemingly unrelated diversification efforts. Do you believe
these efforts contribute to Amazon gaining and sustaining a competitive advantage? Why
or why not?

Diversification is a corporate strategy in which a firm brings multiple businesses within its
boundaries. Firms may vary in the extent to which they diversify the mix of businesses they
pursue, and this is usually decided by their relatedness. For Amazon, they have an unrelated
corporate diversification. This means that they pursue numerous different businesses, and there
are little to no linkages between them. Consider their foray into cloud services, electronics
(including their home-grown Kindle), toys, tools, kitchenware, and more. Plus, their sub-sections
like Amazon Web Services, the Fire phone, the FireTV, Amazon Fresh, and partnership with
multiple online stores (like Zappos). It is the pioneer of providing a variety of products and
services with its low prices and the customer service.

Supply Chain:

Supply chain management includes customer relationships management, supplier relationships

management, internal supply chain management and technology. The effective supply chain
management and distribution helped amazon to make its business operations leaner which
reduces the cost for its customers.

Amazon is using its core competitors for operating in cloud business by diversifying its
business by making an entry into other platforms of business such as smart devices, artificial
intelligence and logistics. Amazon is attempting to diversify its nosiness at a relentless pace and
offers wide selection of products to several of its customers and even quicker distribution.
Amazon by having a conducting trail on the market trend for the new product and its services
can cause gain and sustain the competitive advantages as for any company there is a time where
it reaches maturity stage. So, this is the time to innovate its product offering which is the same
thing that was done by amazon and it diversified into book category which allows students to get
books online and it sustain the online shopping business and gain competitive advantage over the
players in the industry.

Diversification is the least significant among Amazon’s intensive growth strategies. Growth
based on new business is the objective in applying this intensive strategy. For example, Amazon
grew through its acquisition of Audible, which is a producer of audio books and related products.
In this regard, the company partly uses acquisition to implement this intensive growth strategy.
Amazon.com Inc.’s cost leadership generic strategy enables the organization to grow in
diversification by applying the same approaches to minimize operating costs and selling prices.
A strategic objective associated with this intensive strategy is to grow the e-commerce business
through an aggressive acquisition strategy.

Amazon business strategy is guided by four principles: customer obsession rather than
competitor focus, passion for invention, commitment to operational excellence, and long-term
thinking.
 · Regularly entering into new niches and segments

· Strengthening Amazon ecosystem.

· Uncompromised focus towards customer service.

· Focusing on Amazon leadership values.

Unfortunately, to stay ahead of competitors, Amazon must be a first-mover, which often

means not waiting for a profit to turn before jumping into another product category... or having
any experience in it. For as many sales as Amazon gets (almost $1billion in only the Christmas
season), they barely turn a profit. They expand per opportunity versus financial ability... Just as
most unrelated diversified firms are. They are more cost-burdened than their counterparts that
choose a related diversified strategy.

Motivation could include risk reduction, tax advantages, exploiting market share,
growing firm to increase employee compensation. Typically, the value created by these for
unrelated diversification is quite small investors don't take kindly to a "sales before profit"
mindset. This is why research generally shows that related diversified firms outperform unrelated
diversified firms; they have a "profit before sales" mindset.

However, Amazon has gained customer base and analytics into shopping habits that no other
retailer (both online and physical) can match. And they show no sign of scaling back their
diversification. Hopefully those two premises can find a way to work together to produce an
easily-profitable and sustainable company.

5. Is AWS related to Amazon’s core business? Why or why not? Some investors are
pressuring Jeff Bezos to spin out AWS as a standalone company. Do you agree with
this recommendation? Why or why not?
About AWS:
In 2006, Amazon Web Services (AWS) began offering IT infrastructure services to
businesses in the form of web services -- now commonly known as cloud computing. One of the
key benefits of cloud computing is the opportunity to replace up-front capital infrastructure
expenses with low variable costs that scale with your business. With the Cloud, businesses no
longer need to plan for and procure servers and other IT infrastructure weeks or months in
advance. Instead, they can instantly spin up hundreds or thousands of servers in minutes and
deliver results faster. Amazon Web Services has for years been the front-runner in the
business of renting computer power to companies.
Today, Amazon Web Services provides a highly reliable, scalable, low-cost
infrastructure platform in the cloud that powers hundreds of thousands of businesses in 190
countries around the world. With data center locations in the U.S., Europe, Brazil, Singapore,
Japan, and Australia
It happens to be the business for Amazon which brings in the maximum amount of
revenue for Amazon as compared to other businesses Amazon is involved with.Amazon's core
business is Retail Trade and E-commerce.AWS does not complement Amazon's retail arm
however AWS powers the cloud infrastructure the e-commerce operations runs on.
Both business units Retail & Cloud do not correlate. In-fact they are two opposite sides.
While the e-commerce unit deals in physical products, physical deliver, live customer interaction
in most cases. AWS is a complete virtual world where almost every activity is done behind the
screens.
Also noteworthy is that Amazon's retail arm is majorly situated in North America while
AWS is more of an international brand providing services to users all over the world.
AWS exists as its own fantastically profitable business. As for revenue, AWS made up
13 percent of Amazon’s total in Q2, but more than half of its $3.1 billion in operating income for
the same time period.There’s no reason that it needs to be connected to Amazon the e-retailer.
From this below revenue graph of Amazon it is well evident that AWS generates the
major profit that drives the business of Amazon. So my recommendation would be not to spin
out AWS as a standalone company.

6. Perform a SWOT analysis for Amazon.

SWOT Analysis of Amazon

Strengths:
E-Commerce leader:
Amazon is the leading e-commerce brand of the world. The brand has exceeded the 100 million
mark in terms of prime memberships globally. It shipped more than 5 billion items with prime
globally in 2017. Apart from the number of customers, the line of products and variety has also
kept rising at Amazon.
Significant cloud player:
Apart from being an e-commerce player, Amazon is also a leading player in the cloud industry.
Amazon Web Services is a leading provider of cloud based services.

Customer base & loyalty:

Amazon has maintained a very large customer base of loyal customers. Prime is driving the
addition and retention of customers. Prime video is major source of new memberships for
Amazon. Other reasons behind the high level of customer loyalty include customer experience,
quality of customer service and products as well as investment in technology.

Global presence:
Amazon is a global brand with sellers and buyers from around the globe. There are sellers from
every state in United States and 130 different countries listed on Amazon selling their products
to a global audience.
Large range of products:
Amazon sells a very large range of products through its website. The website sells hundreds of
millions of unique products. In several categories including fashion and music Amazon has
become the most favourite destination for the shoppers. The product range has continued to
grow based on the increasing number of third party sellers from all over the world.
Strong financials:
Another major strength of the brand is its financial performance. In the recent years, its sales
have grown very fast. Even if the operating margins are weak, the brand acquires very large
sales resulting in high income. Sales grew by more than 40 Billion dollars in 2017 as compared
to 2016. Its 2017 net sales touched 177.9 Billion as compared to 136 Billion last year. Net
income in the same period grew from 2371 million to 3033 million.

Focus on innovation:-
Amazon has maintained a strong focus on innovation so as to provide its consumers with the
best experience. Apart from providing them with a great shopping experience online the brand
also invests in AI and other areas in modern technologies so as to retain its competitive
advantage. Technology is a major source of competitive advantage for an e-commerce brand in
the modern era. However, apart from managing a great website, it is also important to provide
the customers with a unique experience. However, not just e-commerce but Amazon also
invests in innovation in the cloud business. Its total R&D expenditure for the year 2017
amounted to 22.6 Billion USD which was more than 6.5 Billion higher than the same in the
previous year. In this way, it has continued to raise its investment in R&D every year.

Weaknesses:
Weak operating margins:
Operating margins of Amazon have remained weak traditionally. Apart from a small rise in the
last two quarters they had remained below 3% since the middle of 2016. In last quarter of 2017,
operating margins rose to 3.5% and then in the first quarter of 2018 to 3.8%. Compare it with
Face book’s 45% and that is quite major difference.
Product failures:
In past, some of the products made by Amazon did not achieve the kind of success they were
expected to.

Opportunities:
Diversification:
Diversification provides unique opportunities of growth for Amazon. Apart from e-commerce, it is
operating in cloud industry. The brand can diversify into new and related technological areas
that can afford it faster growth.
Forward integration:
Forward integration can also be a method to achieve higher growth rate. Apart from developing
its own logistics and distribution network, the brand can open physical stores as it opened
fulfilment centres to grow faster and to get closer to the customers.
Acquiring new businesses:
Acquisition of new businesses also offers some faster opportunities of growth. Recently Amazon
acquired Whole Foods market and another company named Ring that operates in the are of
Home Security. Amazon can similarly expand into new areas of business that can help it grow
its business and the brand faster.
Releasing new products:
Releasing new products like its Alexa can help the brand achieve faster growth. However, due
to intense competition from the likes of Google, the brand would like to remain careful about
what products it is trying to build. Product failures often result in losses.

Threats:
Heavy competition:
Competition both in Cloud services and e-retail is a major threat for the brand and it has kept
intensifying. Apart from eBay and Flip kart, Alibaba is also adding to the intensity of competition.
Moreover, there is competition from the physical retail brands that is also causing higher
pressure on Amazon. Wal-Mart’s entry into e-retail has intensified the threat. In cloud industry,
there is solid competition from Microsoft, Oracle, Sales force and other leading cloud services
brands.

Regulatory threats: Legal and regulatory pressures are also creating major trouble for the big
technology brands including Amazon. Especially it is the EU where the environment has kept
changing fast and where top technology brands have faced the biggest challenges including
large fines. In 2017, Amazon was hit by a fine of 250 million Euros in back taxes.

Stronger dollar:
A stronger dollar worldwide has also kept affecting the profits of major international and
technological brands including Amazon. Changes in foreign currency exchange rates can also
have a potential negative impact on the profits of big businesses like Amazon.

Dependence on American markets:

For a large part of its business, Amazon still depends on the American markets. Its North
America net sales in E-commerce were close to double the net sales of the brand
internationally. In 2017, its net sales in North America reached 106 Billion dollars whereas that
from the international sales was 54.3 Billion dollars. Amazon must focus on expanding its
international business to reduce its dependence on the American markets.

7. Which of its competitors does Bezos need to pay most attention to and why?
Amazon needs to pay attention to their competitors like Walmart and target which even
though are players in the offline retail channel but are big players with a strong supply chain
network and hence can anytime compete with Amazon by increasing their presence over the
e-commerce space. Since having e-commerce space is not a capital-intensive strategy, players
like Walmart can enter this space easily and compete with the like of Amazon by using its strong
supply chain network. This is why Amazon needs to keep in check the competition from giant
retailers and work towards strengthening its own supply chain.

a) And how should he deal with them in terms devising Amazon’s business strategy?
To deal with the players like Walmart and target Amazon should develop a strong supply
chain network by making innovative changes in this domain which will significantly reduce the
cost of supply chain network and also make it more efficient posing a strong competition to their
competitors. Amazon can also acquire some of the small and unique highly growing retail
players around the globe to increase its presence in the offline retail channels and be available
to pose competition to Walmart by using the supply chain network of the acquired retailers who
are growing with high pace. These ways can be used to develop a strong business strategy by
Amazon to counter the competition.

b) Amazon.com is over 20 years old and it has $135 billion in annual revenues. As an
investor, would it concern you that Amazon.com has yet to deliver any consistent
profits? Why or why not?
As an Investor, I would not be concerned with Amazon’s inconsistent profits as long as
those profits are invested back into the projects which have the high potential of disrupting the
organized retail space which can create immense value for the customers. It will be wrong on
my part an investor by being myopic and not able to see the value creating opportunities which
can heavily monetize the business of Amazon and reduce the risk of the business by proper
diversification strategy. Hence, as an Investor, I would not be worried as long Amazon is
involved in creating value through innovation and advanced technology.

c) How much longer do you think investors will be patient with Jeff Bezos as he
continues to pursue billion-dollar diversification initiatives?
As investors who share the view of value investing will definitely support the initiatives of Jeff
which are aiming towards diversification and hence would be supported by the investors and will
allow Jeff to make the business more valuable and less risky by appropriate diversification.
Hence, Investors are more likely to stick with Amazon for a longer period of time.