Amazon\'s Cloud Computing (Aws, EC2) Solutions; Paper

Amazon's cloud computing (AWS, EC2) solutions; paper analyze competitive position Amazon's cloud computing solutions industry recommend strategies strengthen firm's competitive position international context.

Amazon's cloud computing (AWS, EC2) solutions

Cloud computing services which are accessed directly over the internet are gaining popularity in this technology age. Industry experts have referred to it as a game changer and it has been shown to give companies competitive advantage through giving them a unique selling point as well as other macroeconomic advantages such as changes in outputs and inputs which increase the profitability of the company. Cloud computing has many advantages above the traditional computing models. Cloud computing helps to create a dynamic world characterized by fast changes in the business world through agile business environments and globalization.

Amazon Web Services is a strong player in the cloud computing industry with 80 to 90% of the market share and the company deploys about 80,000 new computers on the cloud every day as compared to its competitors who deploy less than 10,000 new computers on the cloud every day. The industry structure shows the there is increased interest in the services provided and thus growth of the industry is expected. By the year 2020, the revenue from the industry is estimated to be at $4 billion as compared to the $1 billion it is currently.

By conducting analysis using Porter's five forces model, it is possible to get the industry structure and by reviewing literature on Amazon Web Service and the trends in cloud computing, it is possible to get crucial information regarding the market in which Amazon operates and thus give recommendations for Amazon. The threat of new entrants is high as a result of this potential for growth and so is the bargaining power of buyers. The bargaining power of suppliers will remain low for as long as there are few providers of the cloud computing services but as new entrants continue to flood the market, their bargaining power will continue to decrease. The alternatives evaluated include the use of green energy and the deployment of new data centers in emerging markets such as Africa, Asia and the Middle East and these alternatives are given as recommendations for Amazon to continue its dominance in the cloud computing industry.

Industry structure

Porter's five forces analysis

Threat of new entrants.

With the increased interest in cloud computing and the expected growth in the industry, there is bound to be an increase in the number of new entrants into the market who will create significant competition for Amazon Web Services (AWS). Other factors that will lead to increased number of new entrants is the low fixed costs for customers to switch from one provider to the other, extremely low brand loyalty in the industry as a result of its infancy and lack of government regulations. Though factors such as the high capital requirement for entrants into them market and the relatively high risk involved in the cloud computing industry, these do not bear as much weight as the factors that provide a supporting environment for the adoption of cloud computing.

Threat of new substitutes.

As argued by Guralnick and Constable (2010)

, the main competition for cloud computing is open source computing. SME clients might consider the adoption of the cloud computing strategy in preference to open source computing since the costs for switching over to the new costs are relatively low. Since cloud computing is still in the early stages of growth, there is a relatively high threat of substitutes as a result of new services being provided by new entrants into the industry. Current trends in the organization and low brand loyalty also increase the threat of new substitutes. The market is also largely price driven which increases the threat of substitutes.

Rivalry among existing competitors.

Amazon is one of the dominant players in the cloud computing market with between 80 to 90% of the market share. Among the competitors in the IaaS market, there is no true differentiation between the products being offered which is one of the leading factors for competitive rivalry in the industry. Furthermore, the lack of barriers of entry of new market players also creates increased rivalry among existing competitors who are also facing competition from new market entrants. The slow growth of the industry also creates rivalry among the existing competitors as a result of increased popularity and interest in cloud computing by existing and potential consumers.

Bargaining power of buyers.

The bargaining power of consumers of cloud computing services has the potential to improve greatly as a result of standardization of cloud computing products which reduces the amount of differentiation between the products. Since the industry is growing slowly and is still relatively young, it is expected there will be government policies which will be implemented. Market players will thus be needed to adjust their strategies for regulatory compliance with the law which will create increased bargaining power for the buyers. Additionally as a result of increased number of consumers of cloud computing services, they will have increased bargaining power. The industry also has a low cost of switching from one provider to another which increases the bargaining power of customers Adams, Nelson, & Todd, 1992()

Bargaining power of suppliers.

The bargaining power of suppliers is also high since the industry is unregulated and each supplier has the right to create their own terms and conditions for providing their clients with the services. Another reason for increased bargaining power of suppliers is that there are only a few dominant players in the industry against an increasing number of existing or potential customers. It is also expected that the suppliers will form strategic alliances which will help to improve their positioning in the marketplace. Amazon has a near monopoly in the provision of cloud computing services which gives them increased bargaining power.

Strategic grouping and mobility barriers that affect firm strategy

In the cloud computing industry, the only strategic grouping that exists for the market players are primarily based on pricing policy and product differentiation. There are three major strategic groups. The first is software as a service (SaaS) which are the companies that offer software through their cloud computing infrastructure such as email, word processors such as Google Drive and Office Live and business applications such as Salesforce and NetSuite. The second group is the platform as a service (PaaS) which are the companies that provide development and testing functionality as a service to its customers such as Force.com. The last group is infrastructure as a service (IaaS) which are the companies that provide data management processing and storage services on the cloud and include Amazon, Oracle and Google.

This strategic grouping is based on the ability of market players to compete majorly on pricing and other factors such as product differentiation. However, there is low differentiation between the market players in one strategic grouping. Rivalry is strongest in each of the strategic groups with the SaaS group having the strongest competitive rivalry. There are huge barriers to mobility of market players in the cloud computing industry who do not have the capital requirements in addition to other resources to move in the various strategic groups that exist in the cloud computing industry. These factors that create barriers to mobility are the same factors which separate these strategic groups. Since the industry has low levels of differentiation, it is extremely easy for the companies in the strategic groups to create a new strategic group which will create higher barriers of mobility through heavy advertising and promotion activities to develop brand awareness and greater economies of scale as a result of the new strategic group formed.

Evolution of the industry

Research by Forrester which was quoted in the Economist stated that the category of infrastructure as a service (IaaS) which involves data storage, server and database management services and data management generated approximately $1 billion in sales in the year 2010. This is the category in which Amazon is dominant with 80 to 90 per cent market share. The study also stated that the revenue of the IaaS market is expected to grow to $4 billion by the year 2020. It argued that this increase in revenue in the IaaS market will be as a result of reductions in the costs of computer hardware over the years. This trend will be similar to the personal computer market trend which saw prices reduce considerably over the years as the computers increased in popularity. As the personal computer market is characterized by products that are relatively homogenous so is the IaaS market hence there will be intense price competition and very low profitability. The Forrester research stated that the IaaS market which is low cost and involves large scale storage and management of data in remote servers will only account for 10% of the cloud computing market The Economist, 2010()

Another survey conducted by North Bridge Venture Partners in 2011 on representatives from cloud computing service vendors and end users stated that the cloud computing industry is still in its infancy as a result of 40 per cent of the respondents stating they were still trying out the services and were yet to decide on a complete move towards cloud computing. A further 26% of the respondents stated they were waiting for market maturity in order to adopt the cloud strategy formally. The survey also reported that for the respondents who had been using cloud-based solutions they had been doing so for an average of 20 months which showed that the industry is still young but has great potential for growth. The results stated that scalability and reduction in costs were the primary drivers for cloud usage while innovation and agility were also quickly emerging as a key factor in the adoption of cloud computing. It also emerged that IT companies view cloud computing as a means for effectively implementing new applications quickly while keeping up with the pace of application backlogs and the demands of the business. The study also identified the long-term drivers for adoption of the cloud strategy which were competitive differentiation, mobility and ensuring the interoperability of the applications by using the open cloud APIs. The top inhibitors of adoption of the cloud computing strategy were security and compliance with 31% of the respondents citing these as the key obstacles in the adoption of cloud computing but a further 25 per cent of the respondents cited vender lock-in and interoperability as real threats to the adoption of cloud computing. Among the advantages of cloud computing cited by the respondents were lower total cost of ownership (55 per cent) and IT manageability (39 per cent) Business Wire, 2011()

GigaOM Pro's senior analyst and curator stated in the North Bridge Venture Partners survey that cloud computing is a multi-billion industry but since many of the industry players are still unclear on how they should partner with each other, which technologies they need to adopt, who the competition is and how the cloud technologies can be implemented effectively, the industry is experiencing slow growth. A senior analyst for The 451 Group confirmed this argument by adding that the future of cloud computing shows greater progress and profitability of the cloud computing companies. IT companies selling cloud computing services, however, need to capture on this increased interest and potential in the customers by emphasizing to them the advantages of cloud computing and expectation of cost savings. They should also improve on factors that create obstacles for the adoption of cloud computing such as security, compliance and complexity in order to capture the market needs with ease Business Wire, 2011()

Fox (2011)

argues that though cloud computing is growing slowly at the moment, the trend indicates a rapid and consistent growth in the next five years as more and more companies are seeking to embrace cloud computing in order to significantly reduce their operational costs. The author continue to state that the major factor in adoption of cloud computing is the positioning that the cloud computing service providers will take for their services. This will influence their ability to change the environment surrounding them. From the banking sector to the retail sector, the growth of cloud computing will be large with increased performance standards of mature technological options for consumers instead of rushing head first into an industry that is still experiencing slow growth. These organizations are using this cautious approach since as any new form of technology, cloud computing carries significant risks such as noncompliance or lack of regulations regarding data management and security and lack of case studies or success stories from the companies which have successfully implemented cloud computing.

The growth of the cloud computing industry has seen Amazon experience a 94% growth in the year 2010 while competitors such as Rackspace experienced 106 per cent growth and GoGrid experienced 188 per cent growth. Linode experienced 146% growth in its customer base. Despite competitors experiencing a higher rate of growth than Amazon, it is still evident that Amazon is by far the best provider with the largest customer base. According to the Economist, Amazon creates over 80,000 new cloud computers every day as compared to its competitors who create less than 10,000 new computers each day. This points at extremely high growth for Amazon and thus the potential is high The Economist, 2010()

In advertising and promotion of its products, Amazon cites reliability and efficiency as the major reasons why consumers should move to cloud computing. Amazon has invested heavily in advertising and promotional activities and this has enabled them to reach a wider target market and thus improved their popularity. Bianco (2009)

states that the major reason for Amazon's success over the years is the company's product offering which provides consumers with huge scalability as their companies grow.

Globalization and cloud computing

Cloud computing has led to globalization and globalization has also contributed to the growth of cloud computing Dunning, Harrison, Feller, & Xantheas, 2002.

Companies that operate globally are unable to employ full-time employees to take care of their IT infrastructure. Additionally, the cost of purchasing IT infrastructure for each of their global locations is extremely high. This has been one of the contributing factors for the increased popularity of cloud computing. As companies as seeking to save costs incurred in purchase of IT infrastructure as well as paying salaries and wages for IT staff, cloud computing provides them with a tight-fitting solutions where these companies can instead outsource their IT infrastructure through cloud computing. With increased interest and expansion into new and emerging business markets, companies are finding cloud computing to be an efficient and effective way to save costs rather than implement their own IT infrastructure. They also find that cloud computing helps them to concentrate on the business end without worrying about their IT infrastructure which is also an integral part of their business. In this way, cloud computing enables geographically dispersed business representatives to reach the company's IT infrastructure through centralized control and management thus allowing them greater flexibility in the workplace.

Cloud computing has been known to reduce the required investment in hardware, software, tools and it provides a means for companies to cut through the complexity that is associated with the integration and management of assets in multiple locations. It has also been argued that cloud computing will continue to grow as a result of the decrease in risks for business. As a result of businesses not being required to spend large amounts of money on capital investments, the businesses have reduced risk should anything happen to these IT hardware, software and tools.

Strategy formulation

Amazon's mission is centered on the consumer and it has been the guiding force behind the leadership decisions conducted by Amazon's management team as well as the company's success. The company's vision is to be the most consumer centric company in the world and to build technologies for today and days to come. The company's vision has been the major driving force in the management of unique and groundbreaking technological revolutions which Amazon has pioneered. Among the key competencies of Amazon is their experience with cloud computing. The company has a long standing history of the use of a decentralized IT infrastructure which helped the company's development teams perform their tasks with greater productivity and agility. This led to the company's decision to develop a large-scale IT infrastructure that is reliable and efficient and led to the launch of Amazon Web Services in 2006. Another key competency is the technical know-how that Amazon has regarding cloud computing. As a result of first-hand experience in implementing cloud computing in their organization, Amazon has been able to build a renowned cloud computing infrastructure. Moreover, Amazon provides a path from cloud computing that is low-friction by design. The company has a track record of listening to customers and implementing their views in product design which has led to increased reliability, security, scalability and flexibility of the company's infrastructure services. In addition to this, the company's own websites and other software are hosted on their cloud computing infrastructure which gives the company a task to keep the infrastructure dependable since the company also depends on its own infrastructure. Amazon's cloud computing platform has also received numerous certifications and accreditations for its end-to-end security and privacy. As a result of the company's experience in the design, construction and operation of large scale data centers, the Amazon Web Services infrastructure has been able to ensure physical security of their infrastructure as well as data privacy.

One major constraint for the company is the lack of adoption of energy-efficient strategies. Though the company operates at a large scale which provides them with economies of scale allowing them to have considerably lower organizational costs, the company has failed to implement their own alternative energy policy to use sources of energy such as solar energy or wind energy which are much safer for the environment as compared to fuel and electricity. This is one of the strategies that need to be implemented by Amazon. Use of green energy will help the company reduce its expenditure on other forms of energy thus enabling the company to pass on these cost savings to its customers and thus reducing the pricing of their web services considerably. This will enable Amazon to gain competitive advantage against its competitors who have lower pricing policies. Consumers will thus prefer Amazon which provides better services at a lower cost. Secondly, use of alternative energy will help Amazon align its corporate strategy with the global strategy of reducing harm to the environment. This will help Amazon in making customers feel loyal to a company that is taking the right steps towards reducing the amount of harm it causes on the environment in which it operates. The implementation of green energy is not cheap but the financial gain the company will receive far outweighs the capital input that is required in the implementation of this strategy. This price reduction to consumers as a result of reduction in cost of energy will help Amazon to keep its market share amidst increasing competition from new market entrants such as Oracle who have a premium pricing policy The Economist, 2012()