Amazon.com: business model and impact

¶ … Amazon.com, and projects whether or not the Amazon model will be as successful in the future. This paper then analyzes the case for the opposite type of e-commerce company, one based on very narrow or "walled" competitors.

Although Amazon's strategy today appears to be a winning strategy, this was not true for several years after Amazon's founding, a period during which it consumed massive amounts of capital. Now that Amazon is making significant profits and growing its top line, it is not clear that the Internet of five years ago will be the same as the Internet five years from now.

This paper will argue that Amazon's model must morph into a modern-day distribution business, similar to Sears Roebuck in the 1800's. It will also argue that the "long tail" strategy is the better one for up-and-coming companies, both because of the difficulty of raising Amazon-level amounts of capital, and because of changes in the Internet.

Reasons for Amazon's Survival and Success

Amazon's Jeff Bezos saw a gap in the marketplace which could be filled by a net-based strategy. In short, most book stores were unable to stock the millions of books available which readers might want. And those few which did have a large stock tended to charge high prices because their turnover was so low. Bezos, who had been an investment banker, found that by centralizing book storage and shipping, he could out-compete brick-and-mortar book stores both on selection and on price (as his turnover was so much better).

Amazon's success was more plebian than most realize. It turned from a hip, online retailer of hard-to-find and discounted books to a broad "department store" purveyor of goods. And despite its reputation as net-only, most of Amazon is the old-fashioned warehousing, distribution and telephone sales operation found in many other traditional brick-and-mortar retailers.

Bezos had the good fortune to go public at a time when the stock market was very accepting of new entrants in the dot.com sphere. It soon rocketed to a $20 billion market capitalization, which at the time was higher than Sears Roebuck, the largest traditional retailer of the time (Jenkins 2003). Of course, the subsequent sinking of the dot.com boom could have implicated Bezos' company, but he came up with a convincing story that Amazon.com was worth $20 billion (Dodge 1999).

All the money raised -- and there were billions -- were used to cushion the company as it morphed from one thing to another. Amazon was first a book retailer, but that model was deemphasized after Amazon went public. Then, it became a "software company:"

Under the covers, Amazon.com is a software company. Today, over 600 out of 3,000 people work on software. Jeff deserves enormous credit for insisting that Amazon.com execs hire better people at every level. That way, the quality of the organization is raised with each person hired. (Dodge 1999)

So Amazon subsumed the efforts of other companies to establish "relationship marketing" online (Payne 1994). By understanding the customers' previously-expressed preferences through purchases and browsing behavior, Amazon could, when combined with some basic demographic data (age, sex, location) develops a psychographic profile of the customer. Its most obvious demonstration is when a consumer accesses Amazon's home page; he/she is presented with books which may be of interest. As with NetFlix, E-Bay and other such sites, the customer's purchasing as well as browsing behavior continuously updates the site and hones the offerings to the customer.

Amazon's next incarnation was as a "department store" for items across the Web. 'Come to us and we will give you a store front,' argues Amazon (Amazon 2007). Introduced in 2004, the Storefront concept simplified the decision for many smaller enterprises to create a web presence. It focuses on ease of use, brand image, and searchability.

Amazon's most recent change has been in the area of order fulfillment. Amazon was able to build a highly-automated set of warehouses based on its first book business, which required several million SKU's (stock-keeping units) and a substantial order processing, picking, packing and shipping network in order to fulfill customer orders quickly. The combination of this order-fulfillment capability, plus the increasing number of "storefront owners" with non-Amazon-sourced goods, gives the company the ability to leverage small entrepreneurs with the "back-end" operations which can frequently be difficult for such merchandisers.

Amazon's Business Model: The Next 5 Years

Amazon would not likely have survived to its present success if it weren't for a favorable confluence of events and flexible management during its series of evolutionary changes. Amazon today faces the challenge of size in a world where more and more of what it does is becoming commoditized and tailored to the small- to medium-sized net-present enterprise.

As Amazon formulates its corporate strategy for the next five years, it must take into account changes in customer, supplier, logistics and specific competences within its own organization (Johnson 2005). Each of these changes may dictate further corporate changes to continue a sustainable competitive advantage.

Amazon's strengths today are its large customer base, and the data associated with it. With a decade of customer purchase and browsing experience, the company is well-positioned to understand what the psychographic groups it tracks would like to buy in the future. Through targeted, net-based advertising, Amazon can draw existing customers to new product categories. In addition, it can count on positive customer experiences to extend its market share in currently strong areas.

The following changes will need to be considered for Amazon's coming strategies:

Customer

The customer for Amazon has become more sophisticated. Now that customer-profiling software is more ubiquitous, it is not as obvious that Amazon will continue to have a "lock" on consumer preferences. Customers' abilities to comparison shop means that, as they are looking for a specific product, they will be able to more easily compare prices for the same product -- thus developing a commoditization which makes it necessary for Amazon to keep costs per transaction at a competitive level.

Suppliers

Amazon benefited from a favorable supply situation with its first 'category-killer,' books. That's because books were published by thousands of publishers, and the suppliers were faced with a daunting network of wholesalers and retailers who were difficult to reach. Inventory requirements at the publisher were multiplied by difficulties at the retailer level. Industry practice dictated that publishers take back unsold books, which elevated their shipping and printing charges (Morton 1976).

Amazon is no longer alone in providing these cost advantages to suppliers. Amazon now faces major retailers, from Wal-Mart.com and Barnesandnoble.com to specialty retailers who are able to offer narrow-interest books to a well-defined customer group. Thus Amazon faces the "long tail" problem -- which will be addressed later in this paper.

Physical Distribution

Amazon was able to create a physical distribution establishment which took advantage of diffuse customers and suppliers, and was able to stock millions of volumes and ship in a short period of time. At the time that Amazon developed these capabilities -- at a very large cost -- there were few logistics providers which could take a door-to-door approach.

In the last few years, FedEx, UPS and even the United States Postal Service have developed logistics capabilities which make it easier for small-to-medium suppliers to compete with larger companies with their own warehouse capabilities. FedEx, which is based in Memphis, TN, has created warehouse facilities that allow the company to take orders, fulfill orders, then ship directly to the customer. UPS has followed with similar capabilities (FedEx 2000).

Specific Competencies

Any company with millions of customers and $11 billion in (2006) sales has a good deal of favorable momentum which gives it several degrees of strategic freedom over the next five years. Amazon's current base of customers will continue to be a source for "step-out" businesses, moving from books to recordings, movies and even downloadable software.

The biggest questions for Amazon over the next five years are: (1) can it continue to count on the strengths vs. The competition for customers, suppliers and physical distribution, and (2) can it develop a set of specific competencies which can last for more than a few years?

In the internet-enabled world, Amazon remains a physical distributor with the implication that it must live off the margin between what it buys and what it sells. Reliance on physical products limits Amazon in three key ways:

Its gross and net margins will always be lower than primary internet competitors, such as E-Bay and Google, which do not rely on bricks-and-mortar and acquisition costs, therefore enjoying higher margins.

It is expensive to scale, as increases in sales volume require an increasing amount of brick-and-mortar infrastructure to continue to grow, and it is more difficult for Amazon to expand to other countries. At its current size, Amazon has been able to establish branches in several developed countries; the realities of duties, trade restrictions and the physical distribution costs make it more difficult for Amazon to develop scale as easily as other major Internet presences. In comparison, E-Bay, Google and even Craigslist can expand to new cities and regions with comparatively little infrastructure or investment.

New-found competitiveness for Small- to Medium-Sized Companies

The outlook for smaller companies is much stronger today than it was at Amazon's founding. That's because several of the advantages enjoyed at the time by Amazon have been commoditized or made easier and less expensive to implement.

As the number of users has climbed since 1995, smaller businesses can now take a market-maturing step and segment their customers in an ever-finer fashion (Rangan 1992). While no one can compete with Amazon on sheer number of SKU's, specialist suppliers can seek customers "at the fringe," and develop expertise in esoteric areas in which Amazon or other mass-market retailers cannot offer the same focus or expertise.

The ability to go after smaller niche markets has been augmented by recent changes in the Web -- both in terms of finding customers and completing transactions. This is the so-called "long tail," which means that, while most customers are purchasers of mass-merchandise items, those same customers or others may be in the market for highly-specialized products (Anderson 2006). Chris Anderson, in "The Long Tail," illustrates a number of examples where mass marketing is now giving way to narrow marketing, made possible by the ubiquity of the internet and the availability of highly-targeted advertising.

Online retailers, whether large or small, have the opportunity to turn "long-tail" markets into "steep-tail" markets, which means that it is possible to develop products which develop a following quickly (Tucker 2007).

Since modern search engines are based on popularity and links, as a product or company establishes a reputation quickly, that reputation is multiplied by the search-engine preference effect. Of course, this can be stimulated by "SOE," or search-engine optimization software or human efforts, but the results are dramatic whether generated through actual consumer preference or through search engine manipulation.

Modern-day smaller competitors: Look big while staying small

As compared to 1995, small companies do not need to establish the entire business system in-house. That is, the advantages of reaching customers, logistics and supply can be facilitated by the internet.

Old-model business system

The Old Paradigm for Smaller Businesses

In the "old" paradigm, the costs of entry were fairly high. Companies needed to create their own supply networks through personal contacts, telephones and faxes. It would have been very difficult in the past for companies to be able to find better, cheaper and/or faster sourcing in far-flung places like China or South Africa. Today, with search engines and online commerce, it is much easier to find, screen and conduct business with clients anywhere in the world.