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1 Introduction
Amazon is now a Fortune 500 e-commerce company that is headquartered in Seattle. It is one of the first large companies to introduce the idea of selling goods over the Internet. The company was founded by Jeff Bezos in 1994. Amazon was initially an online bookstore which later diversified to selling other items such as DVDs, music, video games, electronics, and clothing. The company has been credited as being the reason for popularizing online shopping. Amazon is also considered a customer-centric company or even customer-obsessed . This implies that the company truly believes that they needs to listen to their customers or else the company will fail. When compared to Google, Amazon also operates differently from them in the sense that they are very frugal with their resources (Schneider, 2018).
The main purpose of this report is to provide an in-depth business analysis report for Amazon, understanding its institution base view, resource base view, and entry strategy. An internal and external analysis will also be included to determine what factors or resources affect the company and its global operations. A Resource-based view of RBV is a model that uses resources as the key to the superior performance of the firm. This includes the VRIO framework in order to determine the resources that enable the firm to gain and keep its competitive advantage. An institution-based view is when the company considers the formal and information institutional environments (Garrido, et al., 2014). These aspects will be discussed in the next few sections of the report.
2 External Business Environment
2.1 Institution Based View
The concept of an institution-based view can be applied as a perspective in strategic management along with the resource and industry-based views. It is also based on the buyers perception that having effective thirdparty institutional mechanisms would facilitate the companys transaction success. It is a crucial aspect of online marketplaces such as Amazon to increase trust in institutions.
A study was conducted based on 274 buyers using Amazons online auction marketplace as a way to provide support for the proposed structural model. The study concluded that Amazon was perceived as an effective institution with effective mechanisms that have both weak market drivers and strong legally binding mechanisms. These would therefore create more trust in the sellers as a whole community which makes the entire marketplace more effective and trustworthy (Pavlou & Gefen, 2004).
2.2 Amazons Formal Institution Base View
In order to access the institutional base view of Amazon, there are some factors that can be analyzed, including political, legal, and economic factors as described below:
2.2.1 Political Factors
Amazon is an e-commerce business that can also be affected by political stability and government efforts to increase cyber security. The political factors are the external factors such as government activity and how it affects businesses and their macro environments. The three factors in this case are the political stability of developed countries, governmental support for e-commerce companies, and the increase of government efforts on cyber security.
The political stability in any country that Amazon operates in will be an advantage to the company as it allows it to continue to expand and diversify its range and reach. This is also how the company was able to expand its initial online bookstore business to an e-commerce platform where customers can get all kinds of products. Government support is important, especially with the advances in technology and new innovations. e-commerce is widely supported by the government which would make it easier for the company to expand to new areas by receiving such support. However, this could also be an advantage for their competitors who are in the same e-commerce business. One good example is the way Chinese companies are expanding their online presence and trading ability to go across borders and provide services to customers worldwide (Ritala, et al, 2014).
2.2.2 Legal
The legality issues surrounding the buying and selling of goods online are serious for many countries. There are certain regulations that have been set on the practice that need to be adhered to. Some of these factors are the increase in product regulation, a decrease in import and export regulations, and more environmental protection regulations.
The product regulations are a direct result of the way society demands trust from the organizations. The act of purchasing something online can be risky as sometimes there is no guarantee the item will arrive at the correct location. However, this provides the opportunity for Amazon to fortify its brand and reduce the sales on fraudulent sites for online retail. The import and export regulations can be an opportunity for the company to continue to grow and expand its global operations to take advantage of this ease in regulations by increasing its ability to serve its customers from remote locations. Strengthening its brand image is another way that the company can increase trust and differentiate itself from other companies. This can be a good way to remain ahead of the competition as well. Regulatory compliance is also one way the company can remain in business and maintain its success in e-commerce (Molla & Licker, 2001).
2.2.3 Economics
The economic situation is usually a very important factor in the way an institution is being run as it determines the demand and supply of the product. Amazons performance is therefore dependent on the situation of the economy in the countries it operates and runs its online business. The trends in the economy have the ability to affect the macro environment of any kind of industry and this is no different. The main factors that would impact the institution are the economic stability of the most developed markets, an increase in disposable income in developing countries, and the threat of a potential economic recession in China home to some of Amazons largest competitors.
An e-commerce business is more profitable and viable in developed countries therefore, the economic state in these countries is a factor that will affect the macro environment of Amazon. There need to be fewer risks for the company as it continues to expand its online retailing business into new areas. Another growth opportunity for the company is in developing countries where people have more disposable income to spend on things they can purchase online. This would result in a boost in the companys performance as it is generally a new market. The final factor regarding the Chinese potential recession would increase the threat that the market poses to Amazons operations. The Chinese market is still yet to be captured by Amazon and penetrated especially due to the existence of local e-commerce sites. Though this presents a challenge, it can be a good opportunity for the company to create a better strategy to penetrate that new market (Greenspan, 2017).
2.3 Amazons Informal Institution Base View
The aspects of the information institution base view include the sociocultural factors as well as the business ethics and norms that the company adheres to when operating.
2.3.1 Socio-Cultural Factors
The societal behavior and cultural factors of Amazons customers will also influence the institution and its growth in the long run. As a company that is focused entirely on their customers and pleasing them, this is very important for their expansion and growth. Some factors such as an increase in the wealth disparity, an increase in consumerism in developing countries, and an increase in online buying habits are what influence the company (Hong & Zhu, 2006).
The increase in wealth disparity refers to the larger gap between the poor and rich communities in many countries. This is a threat to Amazon as the amount of people with disposable income becomes limited to the richer people. More consumerism is a factor that is present in many countries, especially with the increased ability to access online platforms and therefore online retail shops. This would benefit the companys expansion plans as well.
2.3.2 Ethics
The idea of business ethics in Amazon has been written about countless times with people often asking the questions of how ethical it is for customers to shop using the website. The company has a huge profit margin and is said to be on its way to being the first trillion-dollar company by the end of 2018. There are many studies that show the way other retailers that work for the company are being exploited which reduces the status as rival of Amazon.
According to a study conducted by the Harvard Business School, the new sellers who list new products on Amazon have their transactions monitored by Amazon. Then Amazon began to sell their most popular items as well. These tactics are known as Machiavellian which refers to the extreme lengths that a person or in this case company regardless of ethics in order to remain ahead of their competitors (Benner, 2009). This raises the question of whether it is more important to behave ethically or to earn a good reputation in order to achieve business success (Eluxe Magazine, 2018). Despite their use of such tactics, the company has not received a huge amount of backlash from the market as buyers are often only looking for a bargain and the fastest shipping.
3 Internal Business Environment 1100
3.1 Resources Based View
The resource-based view refers to a model that sees its resources as the way to achieve the best firm performance. This includes reviewing the VRIO framework which is a tool that can be used to analyze how the firms resources and capabilities can be used to sustain its competitive advantage over others (Jurevivius, 2013).
3.2 Resources & Capabilities of Amazon
The first step when looking at the kind of resources that a company has is to identify the tangible and intangible resources that have been shown in the table below:
- Tangible Resources
- Intangible Resources
- Physical Technology, Amazon fulfillment centers
- Human Capital Culture, training, and talented workforce
- Financial long-term sustainable growth in the form of free cash flow
- Reputation brand names, partnerships with other companies like EMI records
- Technological The Amazon Web services and currency converter
- Innovation and Creativity The one-click solution when shopping online
All the above can be used together in conjunction with the companys core competency of continuously working toward innovation. Some of the most important resources and capabilities of Amazon are its brand image and equity, large customer base, global presence, customer loyalty, technological innovation, and huge product range (Pratap, 2018).
- Brand Image and equity: Amazon has a huge customer focus in its image which is a focus of its competitive advantage for the brand. The company has managed to create a high level of trust which is based on the products it sells and the services it provides.
- Large customer base: As the leading online seller in the world, it has one of the largest customer bases from every corner of the world. This is a huge advantage for the brand as an e-commerce company.
- Global Presence: The company has expanded and continues to expand to areas all over the world which has given it is huge network and resources all over the world.
- Customer loyalty: The companys focus on their customers has paid off and helped them maintain a high level of customer loyalty in order to retain a very large percentage of their customers for their lifetime.
- Technological Innovation: Technological innovation is a source of its competitive advantage as well. It enables Amazon to provide a unique and better customer experience through the management of its websites and such. The brand also spends a large amount of money on its research and development.
- Huge Product Range: The number of products on Amazon is huge closer to hundreds or millions of products from over 2 million merchants worldwide. This also gives the company a competitive advantage over the others.
Other resources that can be accounted for are their acquisition of Whole Foods along with the use of their 2day free shipping service. The acquisition of Whole Foods cost 13.7 million dollars for the company but it has converted the online giant into a physical entity. The advantage of this is that they do not have to build any more stores as they already exist, instead, it can be an opportunity to introduce their AmazonGo. AmazonGo is a service that allows customers to walk into the store, pick up anything, and walk out with no waiting lines to check out or selfcheckout systems. The items are automatically charged to the customers Amazon account. This new service has the potential to completely restructure the idea of grocery shopping as we know it. This is not very rare as there are many other grocery shops that already exist in the US such as Walmart, Schnuck, Save-A-Lot, and more. This idea is also not very costly to imitate, especially for their competitors who also have existing structures that they can use. Whole Foods is not truly unique, although the introduction of the AmazonGo feature may make it stand out (Hoban, 2017). The VRIO framework refers to the Value, Rarity, Imitability, and Exploitation that the company undergoes (Jurevivius, 2013).
- Value: is the resource or capability valuable for the firm and can lead to more opportunities to defend the company against threats?
- Rare: how rare is the resource, is it readily available or can it be easily acquired by the competitors
- Imitability: Are there many available substitutes for the resource or capability?
- Exploitation: is the firm properly using its resources to the maximum ability?
4 Entry Strategy
4.1 Strategies to penetrate the Chinese market
The challenge of opening an online retailer in China is something many foreign e-commerce companies struggle with. The main competitors of Amazon in China are Alibaba and JD. In 2016, Amazon had only 1.3% of the Chinese Market which went down from the 2% it had in 2011. The restrictions set on foreign companies in China have always made it difficult for international companies to expand there.
Amazons response has been to purchase a local online bookstore as their starting place to provide an online marketplace for their Amazon Kindles. Kindle is one of the most popular e – e-readers in the West, ranked in the top 5 western brands on Alibabas Tmall. After acquiring the local company, it was renamed to Amazon. cn to create its brand presence in China as well. Part of their strategy is also to analyze the data based on the Chinese customers purchasing behavior and what needs are still unfulfilled. Amazon then prompted the distribution of its CPG goods through three brands names Mama Bear, Wickedly Prime, and Happy Belly in order to penetrate the market and make its way up to the top of the market. These brands could later on be named Amazon Diapers, and Amazon CPG which brings more attention to the brand name (Marketing China, 2016).
Another strategy Amazon had some success within the Chinese market is through cross-border transactions by leveraging its global logistics platform to maintain some of the market share in China as an importer of foreign products. This strategy involved Amazon encouraging its network of over 2 million merchants to use the companys international markets rather than only focusing on the US. The launch of Amazon Prime in China also led to an increase in control of China’s cross-border transactions in 2016 by up to 7%.
The company has also taken advantage of the demand for foreign products which are considered more authentic and safer for the rising Chinese middle class. This resulted in an increase in the number of products that were sent to China. Along with this strategy, Amazon also advertised more positions in Chinese digital content production in order to create ads and promotions that are specific to the locals using their local TV and entertainment media (Business Insider Australia, 2017).
Amazon is known for its low prices and loss-leading pricing strategies. They have prices that are the hardest to beat, however, this contributes to its low-profit margin as well. It also uses a dynamic pricing strategy which involves changing its pricing according to the fluctuations in demand based on the web traffic. This strategy is similar to airlines where Amazon will adjust a price if they notice you have visited the product before in order to influence you to make a purchase (Shpanya, 2014).
4.2 Advantages and disadvantages of using this strategy
Advantages
- Increase in the transactions from China across borders due to the increase in demand for foreign products
- Acquiring the local companies will create a customer base before the companies change their names to the Amazon brand to increase their recognition. This will help increase its market base.
- Amazon is popular worldwide and sells more than its next 12 competitors combined.
Disadvantages
- Amazon is up against the competition of Alibaba which has a 50% profit margin compared to Amazons 0.54%
- Its largest competitor in China is Alibaba which is growing rapidly and is widely popular in the Chinese market.
- Regulations surrounding foreign company activity in China make it difficult to expand quickly.
4.3 Current Strategies Amazon uses
There are certain strategies that the company currently uses that can dominate any market, these include the following (Emmer, 2018):
- Amazon Prime: this is perhaps one of its more valuable resources and strategies to date as it has over 100 million subscribers which makes it the most successful loyalty program of all time. Its increased use of Amazon Prime will act as a barrier to entry for external companies trying to enter the market.
- Fuel for small businesses: Amazon provides a service called Launchpad for start-ups as well as financing to new ventures within the e-commerce services sphere.
- Home delivery and supply chain logistics: The company has an airborne fulfillment center where products can be delivered by drone from a blimp line contraption. This is one way the company has integrated third-party logistics technology into its products. In order to fulfill their 2-day delivery, the company has huge expectations and pressure on its logistics to build better networks to satisfy the growing demand.
- Artificial intelligence: The introduction of Alexa a virtual assistant has changed the market that was dominated by Apples Siri. Alexa offers many more services such as zero-click which has the power to revolutionize shopping as it gives the user the ability to restock on needed suppliers through verbal commands.
- Healthcare: The company is planning on entering the healthcare industry by providing pharmacy services. There is some danger in this if the healthcare inflation remains unchecked, it has a huge potential to explode into a huge new market. the company has also formed a joint venture with Cardinal Health and other distributors in order to increase their reach of medical devices to hospitals and others.
- Geographic Expansion: As stated in the previous section, Amazon is trying to expand to emerging markets such as Asia and the Middle East as there are a lot of opportunities in these areas for providers.
- Acquisitions: Amazon has been known to acquire many different companies such as GameSparks and Blink Home Security as it continues to expand its platform. This is part of its strategy to become one of the most valuable companies in the world. This increases their participation in a diverse group of industries.
5 Implementation
Some of the key processes that need to be undertaken to implement the strategies in China for expansion include liaising or creating joint ventures with local companies. This is a good way to build a customer base by using their acquisitions existing customer contacts. The timeline for their strategy depends on the degree of expansion that the company wants as well. They have been trying to break into the Chinese market for some time now, and their new strategy of using cross-border transactions can be the key. This can take up to a year. Also, their plan to introduce more ads on local platforms in China that adhere to the regulations and appeal to the masses is another way to implement their marketing strategies and growth as well.
Human resources are something the company is already working on, as they have advertised hundreds of local positions in China for their retailing and technological teams in the country. This will both increase their recognition in the Chinese market and their likelihood for success. The introduction of Amazon Prime in the country and the attractive discount packages for the members could also be a drawing point for the Chinese consumer who wants access to foreign products.
6 Conclusion
This paper has looked at the international external business environment of Amazon on a global scale. Particular attention was paid to the strategies the company is using to enter the Chinese market that is largely populated by the Alibaba group. The analysis methods used are a VRIO framework which looks at the resources and capabilities that the company has and how it can help them achieve their goals. An external analysis was also conducted to determine what external factors can affect the way the company does business worldwide.
7 Bibliography
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