Amazon's business model and competitive advantages

AMZN

Key Partners

Thousands of partners

Work with thousands of direct suppliers

Work with thousands of third party vendors

Key shipping partner -- UPS and USPS

Payment partners -- the credit card companies, banks, PayPal

Has to partner with unions in Germany, much to the company's dismay

Key Activities

Amazon sells goods and sometimes services, mostly to consumers

It also provides a marketplace for third-party sellers

Amazon will offer sponsored search and other advertising products to retailers

All of its business is online

Warehousing and distribution are critical processes for the company

Shipping is done by third parties that pick up at the AMZN warehouse

Value Propositions

Large array of goods for sale adds value -- one-stop shopping

Rapid delivery

Free shipping if the order is large enough

Prime memberships

Best selection, ease of use are key value propositions

Make shopping easier, solves customer problems

Bundling products creates value for both customer and company

Customer wants lots of goods, rapid shipping and good customer service; AMZN delivers

Customized shopping experience

Customer reviews add value to help people make purchase decisions

Price is not a big value proposition -- free shipping is actually more important

The convenience factor is very important -- so one-click checkout, remembering past searches, remembering shipping information, having a board product range

Offering different prices is another value proposition

This the role of 3rd party vendors to provide a more efficient marketplace

Customer Relationships

Amazon relies heavily on customer relationships to make itself the first place customers shop

Uses software to build the customer relationship

Remembering customer searches and buying patterns is key to offering new products

Remembering payment and shipping info (1-click checkout)

Mobile apps to reduce barriers to purchasing via phones and tablets

Most customer service is automated; Amazon does not want customers to have to use customer service staff so they seek to reduce the need

Customer Segments

60% North America, 40% International

NA: Media 24.4%, Electronic & general merchandise 67.3%, other 8.4%

International: Media 36.4%, Electronic & General merchandise 63%, Other 0.75

Company does not provide a breakdown of B2C and B2B; likely vast majority is B2C

Amazon is mass market

Segmented mainly by product -- each product has its own segment and Amazon serves them all

Geographic segments mostly; AMZN targets all web users

The company knows what the segments are for its different products, and recommends other products that appeal to the same segments.

This segmentation is more refined than most companies can even dream of, but Amazon has each customer in its database with not only purchase histories but search histories as well. This means AMZN knows more about its customer than any offline retailer ever could.

Key Resources

Technology is the biggest resource.

Amazon invests billions in year in R&D

A lot of this is patent-protected, like the company's systems for remembering customers and providing them with recommendations

Customer relationships are very important

Amazon spends a lot of money on this, to make itself the first place online that people look for goods.

Human resources -- in particular managerial and technical. Also marketing

Money -- Amazon is mostly financed through liabilities, mostly short-term payables

LT debt is increasing

Big data -- Amazon gains advantage from gaining and processing data about its customers, their preferences and data also helps with merchandising.

The ability to process data is of utmost importance

Tech development is huge -- both the website and mobile need to be cutting edge

Large U.S. market allows for many products to be listed.

Amazon's model works best in large markets because of the need for economies of scale in the product and service offerings (warehouses, product line breadth & depth). Not surprisingly, AMZN's best markets are U.S., UK, Germany, Canada and other large economies

A key resource now is to be able to break into some of the bigger emerging markets. So the personnel to do this will be important if Amazon wants to break into India, or compete with Taobao in China.

First mover advantage was a critical resource

Allowed AMZN to beat out competition in online retailing; especially when it started selling all goods

Brand reputation is huge, too. Wal-Mart is trying to overtake AMZN but its brand reputation is not as good.

Brand reputation also means people have Amazon as a bookmark for ease of getting to the site.

Channels

Use of warehouse distribution centers

Third party shipping companies are utilized

Third party vendors are responsible for their own shipping

Online delivery for media and digital content is a growing part of the business

Most goods are either online or via courier (UPS)

Reaching customers via website and mobile apps

Amazon is looking at its own distribution for its fledgling grocery business; testing different models

Customers expect free shipping; this is a challenge but it is also something Amazon can offer as a source of competitive advantage, because other companies cannot offer this as easily

An important channel is feedback, and there are feedback forms.

Amazon also surveys customers to get feedback

Uses email as a marketing channel

Cost Structure

Amazon is a value driven business. It offers customers a unique product/service offering.

Amazon does not compete as a cost leader

It competes on R&D capabilities, product line breadth and customer service

Amazon enjoys economies of scale

The company has many facilities -- warehouses, data centers, offices

51.1% is leased fulfillment/data centers in North America

38.4% is leased fulfillment/data centers in International

Cost of sales 73.5%

Fulfillment 11.5%

Marketing 4.2%

Technology and content 8.8%

General 1.5%

Increase in cost of sales is "primarily due to increased product, digital content and shipping costs from increased sales, as well as from expansion of digital offerings."

Cost of sales also includes third-party seller fees

Fulfillment costs include payment processing

Marketing is mainly online (Associated program, sponsored search, portal advertising, email marketing.

Fulfillment and marketing expenses are variable

Technology and content costs include expansion of offerings, AWS, customer experience enhancement. Some of this expense is capitalized.

On the income statement, general & administrative expense is 13% of revenue