Amazon.com has been one of the pioneers on the market and for fifteen years of its operations, it became the leading company in the world of online sales. The paper explores competitive advantages of Amazon.com in order to reflect its strengths and opportunities and answers a number of questions that each of Amazon’s competitors asks to provide the reader with the idea what kind of weaknesses the company has and what threats it faces. These answers are given in order to provide the reader with understanding why Amazon.com has such a position, why it remains one of the most competitive companies on the market of online sales, and what could hinder the advantages.
Among the strengths, the ability to influence prices for a business on such a market as online retail sales is discussed. Some companies could set the lowest prices throughout the market and attract customers accordingly. The thing is that the customers became more meticulous in terms of pricing so they prefer to have relationships with companies that are able to provide them with the lowest prices. Amazon Company can act like this because it has the largest stock and a variety of products presented on the market. Another opportunity is to present unique brands using exclusive rights of selling these brands. Therefore, the prices for such group of products could not be the lowest on the market.
However, it can pose a threat to Amazon.com on the market. Other major retailers, like Amazon or Wall-Mart could present the same products with lower prices. In the realities of economy recession people tend to purchase less unique products that have lower prices. It means that it is not wise to focus on unique brands and products at this moment. Such business model as Amazon.com and its competitor have suit for the first approach with the lowest prices on the market. Online sales of unique expensive products are less attractive for the customers because of various reasons. One of those reasons is psychological.
The main strategic recommendation for Amazon.com is as follows: it is important to keep the image of trustworthy partner for the customers and other parties involved into the online sales business. People simply do not want to risk substantial sums for a thing that they cannot even touch. Therefore, customers prefer to either purchase low cost products or buy expensive products they have used before. Another reason is less purchasing ability that people tend to have because of the above-mentioned economy recession. Companies that want to enter the market of online sales should consider these reasons planning their activities. Online sales could be a profitable business however, it is necessary to take into consideration the experience of such companies as Amazon and decide if this business could be profitable in each particular case. Amazon Company has fifteen years of experience on such a market and it could be very difficult to compete with such a large company.
Amazon is the leading company on the online sales market. Pricing strategy is among the strengths of the company. This strategy is based on the ability of Amazon to set lower prices than its competitors do. Amazon.com has more items in stock than its competitors and it allows making price generally lower than other companies can offer to the consumers. It provides customers with the opportunity of choosing the same product but for the lower price. Further development of technology plays a substantial role in the pricing strategy of Amazon Company. It happens because better tracking systems allow Amazon track prices on the online sales market and react accordingly to the situation. Therefore, the company is able to implement a more flexible pricing strategy and be always on top of the situation. It also allows always keeping the prices lower than major competitors could offer.
Porte’s Five Forces
Speaking of the major Amazon’s competitors the following companies should be mentioned: Barnes & Noble Inc., eBay Inc., and Wal-Mart.com USA, LLC. These companies provide customers with similar products and opportunities; however, Amazon keeps its leading position. Therefore, supplier power is rather substantial on the marker of online sales and it definitely influences every player on it. According to Jannarone, “A recent study by Matt Nemer of Wells Fargo compared prices on a diverse basket of products and found Wal-Mart is 19% more expensive than Amazon”. It means that Amazon Company has broader range of categories to provide customers with and it is able to set such prices that satisfy consumers more than other competitors do. Another competitive advantage in this case is that Amazon Company has over its rival is raising sales taxes. Jannarone states: “tax-research firm Vertex says average U.S. sales taxes reached a record high of 9.64% in 2010, up from 6.63% in 2009”. It allows Amazon Company to increase its revenue.
Buyer power influence online sales market heavily. Amazon Company has land-based offices and customers have an opportunity to get Amazon’s services in these offices even if they do not have access to the Amazon’s online store – clients of Amazon.com is the main and only asset of the company. Despite all the above-said, Amazon Company has one disadvantage that could hinder its competitive advantage. According to Jannrone, it has higher shipping costs than its competitors do. Therefore, if Amazon Company increases presence of odd-shaped or large products in its stock, it could decrease the revenue and make business less profitable. However, it has not happened yet so Amazon keeps increasing sales and profits still grow.
Computers and the opportunities, they are aimed to provide, have become a common thing for both the business world and regular life. It made competition on the market of online sales to intense. Strong competitive rivalry is one of the essential processes for it. Using a computer now is like watching TV or using a telephone. Therefore, business people concluded that it might not be necessary to create a developed (and expensive) infrastructure that would assure networking and computing capabilities for business. When people require electricity, they do not build a power station to have it. Amazon Company was thinking similarly, while creating and offering its Simple Storage Service (S3) and Elastic Compute Cloud (EC2) services to the world of business (Laudon & Laudon).
It allowed the company to mitigate the threat of substitution because competitors do not provide such services. Another threat on the market is the new entrants however, the position of Amazon Company allows neglecting the appearance of new players on the market – it is already divided between major competitors such as Barnes & Noble Inc., eBay Inc., and Wal-Mart.com USA, LLC.
Amazon.com provides various services aside online sales therefore, it is one of the strengths – diversity. These services are aimed to provide potential customers with computing capacity. In other words, Amazon Company offered the interested parties to exploit the computing capacity that was not used by the company itself. S3 and EC2 are storage devices and servers respectively that can be used by different companies to make Web-scale computing easier and testing procedures less time consuming.
On the other hand, one of the potential threats for Amazon Company is the desire to enter new market segment – online cloud services. The investments are rather substantial even for such a big company and the result is not granted. Amazon utilizes unused computing capacities into which $2 billion were invested and subscribers got the opportunity to store data and use computing power without spending time and funds for creating additional IT infrastructure (Laudon & Laudon). It can make Amazon company perform risky business moves and investments that can be evaluated as a major threat to business.
Instability and thus, low quality of new services of Amazon Company can be one its main weaknesses. Thus, S3 servers have experienced several shutdowns for few years in a row that provoked speculations regarding the reliability of Amazon’s cloud services. Amazon Company reported that not all the components upgraded during the maintenance operations were reliable as they should have been. Subscribers lost about eight hours of services’ outages during this period (Laudon & Laudon). Therefore, one can say that the computer capacity of such scale can be problem by itself.
Despite the issues, Amazon Company offers the most attractive prices for its services in this area among the competitors (Laudon & Laudon). These services are the most appropriate for small and medium scale companies that do not need to create advanced IT infrastructure. The services are most demanded by the companies that cannot predict the development of the business due to its nature. Thus, various online services like e-mail management services (Webmail.us), photo-sharing services (SmugMug Inc.), and even Microsoft use Amazon services to optimize their own business needs and capabilities (Laudon & Laudon).
Amazon Company provides an outstanding opportunity for any interested company to fulfill several tasks at a time. The issue in question is capacity planning, scalability and optimization of total cost of ownership (TCO). These concepts presuppose great analytical skills for managers to assess the future of a company and get prepared for it, creating the appropriate capacities, understanding the future scale and aligning them with optimal TCO. Amazon Company provides services that eliminate the need in complicated planning, risks, and high costs of unnecessary equipment (Vogels; Laudon & Laudon).
The thing is in the following: Amazon.com provides services that most companies need to create by their own efforts in order to assure computing capacity for their needs. Therefore, it creates additional risks of under or over evaluation of the required hardware and other equipment that leads to inevitable additional costs and other problems (e.g. customer dissatisfaction, lack of capacities or excessive expenditures). Thus, Amazon eliminates these risks by providing exactly the same services and in that volume which is needed by each particular subscriber. It allows Amazon Company to exploit computing capacities in full or so and subscribers to pay for the provided services only, avoiding expenditures for unnecessary equipment and additional personnel (Laudon & Laudon; Vogels).
As it can be seen, capacity planning is avoided by the subscribers – they can use the needed capacity and pay for it only. Scalability issues are not a problem for the subscribers as well – capacities can be added in case of necessity and according to the further business development. Finally, TCO will be always optimal for the subscribers and Amazon Company because on the one hand, customers reduce their expenditures for IT infrastructure creation and maintenance and on the other hand, Amazon Company returns funds, invested into the S3 and EC2 services (Laudon & Laudon; Vogels).
However, Amazon Company is not the only company on the market of utility computing services (also known as cloud computing for business) (Byrne). Such companies as Rackspace, GoGrid, Salesforce.com, Google, Microsoft, AT&T, and a number of others also provide services on this market (Brodkin; IBISWorld). The analysis of competitors can provide broader view on the current position of Amazon.com on the market new to it.
Thus, Rackspace Cloud provides such services as Cloud Sites: a) platform for web sites building), Cloud Files (storage), and Cloud Servers (the service similar to Amazon EC2); b) It assures constant availability of the services and has had reputation of a trustworthy company for more than ten years already; c) The company bills its clients for the used services only, just as if Amazon does; d) Rackspace target clients are web developers and software-as-a-services providers, according to Brodkin.
GoGrid.com, as one of the noticeable players on the market of cloud services, provides even more advanced service than Amazon Company does in the area of servers’ usage. The company provides deployment of “Windows- and Linux-based virtual servers onto the cloud, with preinstalled software including Apache, PHP, Microsoft SQL and MySQL” (Brodkin). In addition, GoGrid Company guarantees 100% uptime for its servers and applies pay-as-you-go approach to the billing process of the customers. Their target clients are start-ups, services exploiting Web 2.0 and SaaS for the business, and also SAP and Novell, testing their small pilot project on the GoGrid capacities (Brodkin).
Finally, Salesforce.com provides services for the companies that need “CRM tools, including automation, analytics, marketing, and social networking tools” (Brodkin). In addition, Salesforce.com offers to use Force.com, a platform used to build web application of different kind. It is one of the pioneers of the cloud market. The CEP of the company, Marc Benioff has been one of the top positions in Oracle for thirteen years (IBISWorld). The company guarantees 100% uptime for its servers and services to more than fifty-five thousands of customers in very different industries, from financial, communication, media, to healthcare and others. The company also uses pay-as-you-go mode of billing so it is a common approach for all the leaders of the cloud market, along with Amazon Company (Brodkin; IBISWorld).
In case of launching a web startup business, it would be wise to choose utility services provider according to the area in which this startup will operate. Amazon Company provides storage and servers’ usage services, while Rackspace does it too; GoGrid Company specializes on web services, and Salesforce.com – on business. Therefore, considering the startup business “nature”, it would be either Amazon or GoGrid. Amazon Company is the leader of its area so it would be appropriate to use its services, considering the lowest prices on the market as well. This is one of greatest strengths of the company – the ability to provide competitive, high quality services on the market, different from online sales.
As for the new web-based startup business and Amazon services, it is possible to say that Amazon Company can offer rather competitive terms for any business, in any area because of the variety of options, assured by S3 and EC2. Specialized social community network can be created on the base of these services. On the one hand, the servers (EC2) can be used to set up the initial infrastructure of the social network, while storage capacities are to be used as database for new members of the growing network. Therefore, Amazon Company would be able to cover all the needs of the startup for a rather low fee.