Amazon Strategic Management 1

AMAZON STRATEGIC MANAGEMENT

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 Amazon Strategic Management 2

Summary

Many major retailers, as well as consumer manufacturers, are going global to tap into the

considerable share of the fast-growing online retail market. Founded in Seattle, Washington

on July 4, 1994, Amazon.com established an online retail platform that understands consumer

expectations and needs. Jeff Bezos, Amazon’s CEO, recognised the need to deliver more

advanced multichannel capabilities that the traditional forms of retail industries failed to

provide. Amazon thus thrives as a giant corporation, capable of delivering items at affordable

prices in the least possible time. Despite Amazon’s market position, the company is

confronted with intense competition, operational complexity, and seasonality issues. The

objective of this analysis is to determine Amazon.com Inc.’s strategic management. This

paper will accomplish this by performing strategic analysis, carefully analysing its enterprise

model as well as the aspects of the e-commerce and online retail market and provide strategic

recommendations on how to address these challenges.

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Table of Contents
Summary .................................................................................................................................... 2
Table of Contents ....................................................................................................................... 3
Introduction ................................................................................................................................ 5
Role of Amazon.com, Inc. ..................................................................................................... 5
Market Share .......................................................................................................................... 5
Key Categories ....................................................................................................................... 6
Organisational Structure ......................................................................................................... 6
Amazon Mission and Vision Statement ................................................................................. 7
M&A Synergies...................................................................................................................... 8
Organisational Context .............................................................................................................. 9
Online Retail .......................................................................................................................... 9
Target Client Base ................................................................................................................ 10
Subscription Plans as Value-Added Proposition .............................................................. 11
Macroeconomic Analysis......................................................................................................... 11
Porter’s Five Forces ............................................................................................................. 11
Competitive Rivalry (Strong Force) ................................................................................. 12
Buyers Bargaining Power (Strong Force) ........................................................................ 13
Suppliers Bargaining Power (Moderate Force) ................................................................ 15
Threat of Substitutes (Strong Force) ................................................................................ 15
Threat of New Entrants (Weak Force) ............................................................................. 16
Recommendations ............................................................................................................ 17
Value Chain Analysis ........................................................................................................... 17
Logistics............................................................................................................................ 17
Marketing ............................................................................................................................. 18
Technology ........................................................................................................................... 18
Issues and Impact on Value Chain ........................................................................................... 19
Core Competencies and Capabilities ....................................................................................... 20
Price...................................................................................................................................... 20
Use of Third-Party vendors .................................................................................................. 20
User Experience ................................................................................................................... 21
Strategic Challenges................................................................................................................. 21
Competitive Threats ............................................................................................................. 21
Operating Complexity .......................................................................................................... 22
Seasonality Issues ................................................................................................................. 23
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Recommendations .................................................................................................................... 23
References ................................................................................................................................ 26
 Amazon Strategic Management 5

Introduction

Industry experts often characterise Amazon.com, Inc. as one of the leading customer-

centric corporations (Gregg and Groysberg, 2019). The company’s mission focuses on

making the customer's lives easier. Amazon has spread into multiple types of technology and

commerce where it provides products at low-cost and supplies the goods at affordable rates.

This essay provides a strategic analysis of Amazon using various lenses, concepts, tools, and

theories, including microeconomic and macroeconomic analysis ( Value Chain Analysis and

Porter’s Five Forces); these tools provide the framework for evaluating Amazon’s strategic

position in a highly competitive industry. Based on the findings of the assesment tools, this

essay will highlight the strategic challenges and address these challenges by outlining

strategic options on how Amazon can increase its profit margin in the growing online retail

business.

Role of Amazon.com, Inc.

Amazon is not the biggest organisation in the US; by market cap, the company tails

Apple. Measured by the total employee count, Wal-Mart beats Amazon, and by earnings

growth, Amazon ranks eighth on the fortune 500 (DePillis, 2018). However, measured by

significance to contemporary life and the ability to shape the US economy, Amazon plays a

significant role. Part of the organisation’s outstanding influence stems from its business

strategy with a focus on consumer experience. Amazon has grown organically from an online

bookseller into an eCommerce icon hat plays in multiple sectors.

Market Share

Recent data indicates that Amazon’s market share of the US eCommerce retail market

hit a 37% mark, and is projected to increase considerably by 2021 (Clement, 2019). One of

the corporation’s business-level strategy to increase consumer spending is Amazon Prime, a

subscription membership that guarantees free and speedy shipping options as well as
 Amazon Strategic Management 6

streaming video and music. As of December 2018, 62% of Amazon’s customers had

subscribed to premium membership; this is relevant to the firm’s success, as Prime users shop

more than non-Prime members on the Amazon platform, thereby adding more revenue to

Amazon.

Figure 1: Amazon.com projected market share, Source: (Clement, 2019)

Key Categories

Amazon began by selling books. Today, the company is a titan of media, data storage,

hardware, payments, logistics, and eCommerce. Amazon is involved in the business

electronic devices, including a digital assistant that many customers depend on to conduct

daily tasks (Alexa), a home security system (Ring), and an electronic reader (Kindle).

Amazon servers host a third the data stored in the cloud globally. Moreover, the company

acquired Whole Foods hence becoming a brick-and-mortar retailer that it has transformed

into cashier-less convenience stores (Gershgorn et al., 2017).

Organisational Structure

The organisational structure of Amazon is hierarchical in nature. The senior

management team comprises of two Chief Executive Officers (CEOs), three Senior Vice

Presidents, and a Worldwide Controller. These executive managers control core features of
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the business operations reporting to Bezos, the company CEO. The organisation is divided

into seven segments, as shown in the diagram below.

Figure 2: Amazon.com Organisational Structure, Source: (Amazon 2017 Annual Report,

2017)

Amazon Mission and Vision Statement

Amazon.com, Inc’s vision and mission statements define the corporation’s status as a

giant online retailer in the globe. In theory, organisational vision statement guides company

direction toward the desired prospect of the business (Free and Miles, 2014). The mission

statement, on the other hand, describes business goals and provides organisational direction

toward strategic management of the firm. Amazon’s mission statement is “We strive to offer

our customers the lowest possible prices, the best available selection, and the utmost

convenience” (Gregory, 2019). The mission guarantees attractive online retail services to

meet the demands of end-users. Amazon concentrates on convenience, selection, and price.

Amazon’s mission statement focuses on the superior and effective service offering. The

organisation emphasises on consumer's convenience in having access to the most suitable

items in the online retail market.

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In relation, Amazon’s vision statement is “to be Earth’s most customer-centric

company, where customers can find and discover anything they might want to buy online”

(Amazon, 2019). The vision statement stresses the organisation’s fundamental objective of

leading online retail industry around the globe. The fulfilment of these corporate statements

fosters further improvement of online retail business for continued success in the global

market.

Amazon’s corporate vision and mission statements are important in designing

strategies to enhance the firm’s competitive position against its rival corporation such as Wal-

Mart, Apple, Microsoft, and Google. Specifically, Wal-Mart creates a strong competitive

force, as evaluated in Porter’s F5 analysis within the literature. Amazon’s corporate mission

and vision statements also have a significant influence on the activities of its mergers and

acquisitions such as Whole Foods. Given the wide range of its products, that include

computer hardware and software, cloud computing services, and online retail services,

Amazon aligns its mission statement with its vision to integrate its diverse business

operations.

M&A Synergies

A synergy arises in Mergers and Acquisitions (M&A)s when the combined values of

the two entities are greater than the pre-merger values of both companies combined. Amazon

has acquired over 76 firms, the top eight being Whole Foods (valued at $13.7 billion in

2017), Ring ($1.2 Billion in 2018), Zappos ($1.2 billion in 2018), PillPack ($1billion in

2018), Twitch interactive (970 million in 2014), Kiva Systems ($775M in 2012), Souq.com

($580million in 2017), and Quidsi ($500 million in 2011) (Wolff-Mann, 2017). Amazon

acquired these firms to get a foothold on their respective business and compete with rival

firms in the retail market. For example, Whole Food has a reputation for quality as well as
 Amazon Strategic Management 9

massive infrastructure for food logistics; this creates synergy for Amazon because of the

benefits whole food provide.

Organisational Context

The specific organisational context discussed in this report is Amazon’s strategic

position in the online retail industry. There has been a significant shift over the years from

traditional retail to online retail, especially with the increased access to internet services. This

section of the report presents a current scenario of eCommerce industry that is the core of

Amazon’s business that will serve the purpose of analysing the company’s internal and

external environment.

Online Retail

US Commerce department indicate that consumers spent over $517.36 billion online

with US retail traders in 2018, up 15 per cent from 44.88 billion spent in 2017. eCommerce

market a growing share in the digital retail industry in 2018, taking a14.3 per cent share of

the overall sales in 2017, up from 12.9 per cent in 2017, and 11.6 per cent in 2016 (as shown

in figure 1). More significant is that online retail represented 51.9% (that is more than half) of

all retail sales revenue. The figures represent the largest share of growth for transactions

conducted through eCommerce platforms since 2008, when online retail accounted for 63.8%

of overall sales growth (Ali, 2019).

Amazon is the leading US online retailer and continues to expand its stronghold in the

US retail industry. Ali (2019) estimates that the total transaction value from US customers to

Amazon was $206.82 billion in sales in 2018, a 16.3 per cent increase from 2017. The

implication is that Amazon alone accounts for 40 per cent of US online retail, and the

company accounted for 43.3% of online retail gains in the US in 2017. The company’s

dominance in online retail is partly owed to its marketplace, that enables the retailer to sell

millions of stock-keeping unit (SKU). Online retailers use SKUs to track inventory levels to
 Amazon Strategic Management 10

determine the products that need reordering. By adding SKUs to every product variation,

these online retailers can easily track the number of available products and create threshold

limits to enable them to know when new purchase orders must be made.

Figure 3: US Online Retail Penetration, Source: (Ali, 2019)

Target Client Base

Statista (2018) provides information about the worldwide number of active Amazon

user accounts as of Q1 of 2016, where Amazon had 310 million active users. The company is

among the popular eCommerce business globally, providing customers with more than world

wide shopping experience and also offer several value-added services. For example, there are

many services associated with Amazon Prime membership that makes many US users

participate in the yearly subscription of the service. Many Amazon Prime subscribers admit

that the free two-day shipping as the central attraction. Other customers also value online

services, for example, unlimited instant video and audio streaming across multiple platforms,

along with exclusive discounts and promotions. These prime members are especially active

Amazon consumers, recording a higher spending average when compared to their non-prime

user counterparts.
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Subscription Plans as Value-Added Proposition

Amazon provides value that aims at prospects such as students and mothers with its

Amazon Student and Amazon Mom. The company offers value to these specialised groups

with deals and discounts for students, and the mothers are offered discounts on family

households and baby products coupled with 2-day free shipping on more than 100 million

goods, unconstrained streaming of television shows, movie, and music for prime members.

The prime monthly subscription is currently $12.99, and student subscription is $6.49 per

month (Su, 2018). Many products that Amazon sells are not only cheaper compared to

traditional retailers but are also delivered to the customer’s doorstep, in two days or in some

cases, on the same day. This eliminates waiting time at the register and implies fewer trips to

the store, and when the digital services (video, music, and photos) are added, it becomes

customer-centric.

Macroeconomic Analysis

Porter’s Five Forces

Amazon continues to lead in the online retail market due to certain strategic issues,

such as the ones described in this Porter’s Five Forces model. Michael Porter designed the

Five Forces framework as an instrument for analysing the external environment of business

organisations. Concerning Amazon, certain external factors influence the conditions of the

online retail industry ecosystem, with a focus on eCommerce activities. Nonetheless, other

markets are also considered, as the corporation has operations in online services such as

cloud computing, distribution of digital content, and consumer electronics. Amazon stands

out as the most iconic player in the digital retail industry. The firm must, therefore constantly

examine the external dynamics in the eCommerce market to sustain its current industry

position both in short and the long term by using the tools such as Porter’s Five Forces

analysis model. The forces of major opponents such as Wal-mart, Microsoft, Google, and
 Amazon Strategic Management 12

Apple can be effectively managed through strategic design that contributes to the major

forces on Amazon’s online retail business.

Amazon stands out as the leading player in the eCommerce business sector. However,

identified external aspects in this Porter’s Five Forces (F5) evaluation identify a possible

reduction of overall organisational performance as well as market share, especially due to

strong rivalry involving large corporations in the retail industry. Amazon’s intensive growth

strategies and generic competitive strategies must be adjusted to include the participation of

more consumers and firms around the globe. The Seattle icon competes against multiple

firms, including large retail multinational corporations such as Wal-Mart and also smaller

online retail stores. The international scope of the online retail industry also leaves Amazon

vulnerable to a wide range of external threats. Therefore, Amazon must adopt necessary

strategies that will help it stay on the lead amid variations in the conditions of the digital

retail market ecosystem. Based on Porter’s Five Forces Analysis model, the following are the

forces of the external factors influencing Amazon’s performance:

1. Threats of new entrants or new entrants (weak force)

2. Threats of substitution or substitutes (strong force)

3. Suppliers’ bargaining power (moderate force)

4. Buyers’ bargaining power (strong force)

Competitive Rivalry (Strong Force)

Amazon competes against large multinational corporations. This aspect of Porter’s F5

analysis tool addresses the impacts of the organisation relative to each other’s businesses.

With regards to Amazon, the external factors listed below largely contribute to the elevated

competition intensity in the digital retail industry ecosystem; these are low switching costs,

increased availability of substitutes, As well as increased aggressiveness of companies, all of

 Amazon Strategic Management 13

which have a high intensity. One of the key characteristics of retail firms is high levels of

aggressiveness, and they exert intense competitive forces against one another. As an example,

the rivalry between Walmart and Amazon has intensified over the years, and Wal-Mart

appears to be gaining traction. Wal-Mart is the world’s largest retailer, and the company’s

2018 Q2 results indicated the firms' shares increase by 10% (Cheng, 2018). Visits to

Walmart’s brick-and-mortar location surged by 2.2%, and average consumer spending per

transaction also increased.

Moreover, increased demand for the company’s fresh-food segments pushed its most

convenient grocery purchases in 9 years. Generally, the key to Wal-Mart’s sales was an

unprecedented 40% surge in online sales. While eCommerce was responsible to merely 1%

point to the 4.5 per cent total US similar-store earnings growth, Walmart’s earning, revenue

had a far broader ripple effect (Cheng, 2018). Walmart's omnichannel programs are

contributing to higher earnings growth and providing consumers with new levels of shopping

convenience, similar to Amazon. Also, as with Amazon’s strategy, Wal-Mart is continuously

offering digital capabilities to its stores to provide a seamless experience for consumers.

While Amazon is considered an icon in the online retail business, Wal-Mart is showing that

its sizeable fleet of stores (that is within ten miles of 90 per cent of the US population, is a

powerful competitive weapon. Comparatively, Wal-Mart had almost 4800 stores in the US by

Q2 2008, including 3600 supercenter stores while Amazon's Whole Food Stores fell to below

500 (Cheng, 2018). Given that Wal-Mart Amazon’s biggest threat, this report chose the

former in Porter’s Five Force analysis. Competition against Wal-Mart must, therefore, be a

priority to guarantee the firm’s continued competence in the online retail industry.

Buyers Bargaining Power (Strong Force)

As previously discussed, Amazon’s mission and vision statement indicate the firm's

customer-centric strategy to an online retail business. This aspect of Porter’s F5 analysis

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framework explores the impact of clients on companies and the industry ecosystem. In the

case of Amazon, this report has identified the following external features that are responsible

for the high intensity of the buyers bargaining strength: high availability of substitutes, low

switching costs, and high quality of information. All these factors have a strong force.

According to Mourdoukotas (2019), in the age of digital information, customers have

easy access to relevant details about the services of digital retailers as well as the services

these firms offer. This particular external factor affects Amazon based on the ability for

consumers to find other options to the organisation's eCommerce service. Concerning low

switching costs, the online retail industry has many players and therefore making it easier for

purchases to shift from one corporation to the other. A Wal-mart online customer enjoys

lower prices, not having to pay a subscription fee and also provides fast shipping in many

orders (Mourdoukotas, 2019). Wal-mart users can also order delivery items for a better deal,

and usually, get their goods delivered on the same day. For Groceries, Wal-Marts delivery is

one of the most affordable options available. Therefore, buyers can easily switch from

Amazon to Wal-Mart without at low costs.

Moreover, the high number of substitutes in the online retail industry adds to the

buyers' leverage to easily shift loyalty from one company to the other. As an illustration,

instead of buying an item on Amazon’s website, a buyer can easily walk into Walmart stores,

that are located at strategic points across the US. The external factor of this aspect, therefore,

shows that Amazon that when developing its strategic management, Amazon should take into

account the strong bargaining force of consumers as a significant factor in tackling strategic

business issues in the eCommerce industry.

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Suppliers Bargaining Power (Moderate Force)

Amazon needs materials to run their online retail operations, and the suppliers control

the availability of these products. The impact of the suppliers in the eCommerce business

ecosystem is assessed in this aspect of Porter’s F5 analysis framework. The suppliers have a

moderate influence of Amazon’s online retail business because of the following external

factors: the size of supplier and forward integration (these two exert a moderate force), and a

small population of suppliers that exert a strong force on Amazon.

When the number of suppliers is small, they have the power to levy a powerful force

on organisations. For instance, price fluctuations of equipment from a small size of large

suppliers has a considerable impact on Amazon’s online, operational expenses. Nonetheless,

the moderate forward integration restricts the definite impact of suppliers on Amazon’s

business. A moderate forward integration implies that the suppliers’ control on the sale of

their merchandise to giant corporations such as Amazon is limited. Additionally, the

moderate size of many manufactures scales down their influence of Amazon’s eCommerce

operations. As such, this aspect of Porter’s F5 enables is useful because it identifies the

moderate influence of suppliers as a strategic determinant in the eCommerce business

ecosystem.

Threat of Substitutes (Strong Force)

There are many substitutes in the online retail industry environment. This aspect of

Porter’s F5 analysis framework explores how these substitutes impact the online retail

business. With regards to Amazon, this report has identified these factors to reinforce the

high intensity of the threat of substitution: low cost of substitutes, increased availability of

substitutes, as well as, low switching costs. All the three factors mentioned above exert a

strong force. Amazon frequently battles with a powerful force of substitutes, that threaten its

overall performance. In relation to the low switching costs, buyers can easily opt for other
 Amazon Strategic Management 16

retail platforms, thereby shifting their money from one firm to other corporations. As an

example, clients can easily choose to purchase products from Wal-mart instead of using

Amazon’s eCommerce website. The increased availability of substitutes, coupled with the

less expensive product offerings expenses, further augment the powerful influence of

substitutes against Amazon in the online retail industry. Therefore, the external aspects of the

threat of new substitutes indicate that Amazon should continually develop strategic options to

stay ahead of the game.

Threat of New Entrants (Weak Force)

New establishments potentially lower the market share of Amazon in the digital retail

industry. The influence of new entrants is discussed in this section of Porter’s F5 framework.

Amazon faces a weak force of the threat of new entrants in the online retail industry due to

the following reasons: increased economies of scale and high brand development cost, both

of which are weak forces, and low switching costs. As previously mentioned, the switching

costs in the eCommerce business is usually high because major actors also offer affordable

pricing and faster delivery options. Small firms use this as an advantage to applying a

powerful force against Amazon. However, owing to the increased cost of brand development,

these small firms lose their edge against the already established Amazon in the online retail

business. For example, a small firm that considers competing against Amazon would require

a substantial amount of capital in terms of billions as well as years of building up the brand

name. Moreover, Amazon enjoys the increased economies of scale that does its digital retail

business over the edge. The new firms would need to achieve the high economies of scale to

reach Amazon’s level. Drawing references from the external factors of this aspect, new

entrants are an insignificant strategic challenge in the performance of Amazon in the

eCommerce industry.
 Amazon Strategic Management 17

Recommendations

Based on the Porter’s Five Forces, Amazon must deal with the critical forces of

competition, substitutes, and consumers in its strategic management. This report suggests that

Amazon must deal with the powerful force of competitive rivalry by allocating more

resources on the strengths as well as the competitive advantage of the eCommerce industry.

For instance, Amazon can continuously enhance its brand image, that is one of its powerful

weapons. The company can tackle the external features associated with the powerful intensity

of the buyer’s purchasing force by emphasising the quality of service. For example, reduction

of counterfeit products can enhance customer experience and satisfaction in using Amazon’s

online retail platform. The other strategy is for Amazon to address the threat exerted by

substitution by improving its service to attract and retain consumers. For example, Amazon

can progressively and innovatively enhance the usability of its online platform to optimise

consumer experience. These suggestions aim to increase Amazon’s competitive strategy,

along with sustainable success in the eCommerce industry.

Value Chain Analysis

Value chain analysis refers to an analytical model that helps in recognising business

actions which can produce value as well as, competitive edge to the organisation.

Logistics

Considering the consumer-centric strategy of Amazon, a major facet of value creation

for the company is the fulfilment of orders, that is accomplished when the client finally

obtains the ordered item. Order fulfilment process is closely linked to the supply chain and is

maintained by inbound and outbound logistics. Inbound logistics involves cost minimisation

by ordering the items from vendors, and that results in stock optimisation management

processes. Outbound logistics, on the other hand, entails shipping, packing, sorting, and
 Amazon Strategic Management 18

picking. In the process, the expenses are continuously decreased, employing technological

advancements.

Investment concerning the development of fulfilment space guides Amazon closer to

the needs of the client. The organisation guarantees a speedy order fulfilment utilising its

supply chain associates, that deliver products packed in Amazon wrapping straight to the

consumer. The other advantage is elevated product range, reduction of transport expenses,

and enhancement of product availability in fulfilment. Ample fulfilment space, drop shipping,

and technological developments, enable Amazon to recognise its enormous potential and to

offer a comprehensive portfolio of merchandise ascertaining to the corporation’s image as the

fastest retail 'shipper' on earth.

Marketing

Amazon employs typical types of promotion techniques such as television, internet

banners, and print, and also uses its participatory network to a striking marketing advantage.

As an illustration, Amazon has adopted the pay-per-click promotion on giant search engines

(Yahoo, Bing, and Google). The company also utilises direct email marketing with focused

consumer service. Moreover, Amazon enrolled an associate program in 1996, designed to

enable smaller websites to pump in traffic for Amazon.com. The strategy has largely

contributed to the unparalleled presence of Amazon and has enhanced the website

positioning. Therefore, by creating its network of buyers through these tactics, Amazon has

an added advantage against its competitors in the online retail industry

Technology

Technology stream has a vital function to drive and improve Amazon.com’s business

solutions. Data gathered from various Amazon are teaming up to generate a cohesive

consumer experience. A buyer can click on the Amazon online store to obtain a couple of

products for dinner, request Alexa to search up ingredients of a particular product and the
 Amazon Strategic Management 19

item suggestion engine can assess that the purchaser should buy a particular type of home

appliance. Rather than oppose each other, several departments share their inventive expertise

to deliver a tailored and cohesive client experience. Moreover, the company sells its Machine

Learning (ML) and AI program through Amazon platforms to prospects, including the NFL

and NASA (Morgan, 2018). By taking exploiting AI breakthroughs and functions in other

parts of the corporation, Amazon provides unique AI strategies to small and large businesses.

Issues and Impact on Value Chain

The first pressing issue is competition. Amazon would find it difficult to compete

with the capital and human resources present Wal-Mart Stores Inc. According to Ron

Johnson, former CEO of JC Pennu Co. Inc., “Wal-Mart is Amazon’s greatest threat” (Aiello,

2017). Wal-Mart may spend more on R&D and technology, logistics, and advertising

compared to Amazon, giving it a strategic disadvantage. As a consequence, Amazon’s

perceived value chain can be reduced, thereby lowering overall sales. The second issue is an

expansion in which Amazon plans on expansion strain on key resources such as logistics and

human resources (Soper and Black, 2018). If the company fails to manage the expansion, it

could tarnish brand equity and adversely affect its operating results. Also, a similar value

chain for the US market might not apply to new markets and technology challenges in new

markets become a daunting task for Amazon to expand.

The third issue is seasonality; Amazon experiences a revenue and sales spike in Q4 of

every year. If the firm is not capable of restocking inventory to meet demand, it could affect

revenues. On the other hand, overstocking can affect profitability. The large numbers of

online traffic during holiday shipping may bring system interruptions and strain the IT

systems. Amazon may also be under strain of human resources in logistics and customer

services personnel at this period of the year. The company also faces regular system

interruptions, which make its websites slow to respond and prevents Amazon from fulfilling
 Amazon Strategic Management 20

certain orders. As such, the company can experience a reduction in net sales as well as the

reduction in the attractiveness of the firm’s products.

Changes in consumer demand & taste can affect what inventory Amazon needs to

have. Amazon attempts to use business intelligence to predict these, but the uncontrollable

nature of these may lead to inventory problems. Lastly, Amazon outsources its payments

systems to third parties; this subjects the company to regulations and fluctuation in payment

processing fees, which can affect profitability. In effect, Amazon's IT systems get strained

further in that security breaches may result in fines and litigation by banks if sensitive

information is released without authorisation.

Core Competencies and Capabilities

Price

Amazon has mastered the art of providing affordable prices to enhance sales and keep

consumers at the same time. One of the important techniques with the ability to accomplish

this is to reduce logistics overheads. The firm lowers its costs by keeping a small inventory of

its goods. The beneficial economic distribution and as well as management of work capital

enables Amazon to spread on the savings to consumers. In case the top ten vendors had

Amazon’s capabilities to slice these distribution costs, these third-party vendors could save

thousands and millions of dollars; therefore, Amazon's pricing is an integral, outstanding

competency.

Use of Third-Party vendors

Amazon has established a competitive environment for other retailers who place

goods for sale on the company's platform (Sawyer, 2018). This strategy benefits Amazon

publicise its status and provide the least expensive prices owing to the stiff pricing

competition in the environment. Consequently, the vendors serve Amazon’s interests and

enhance client loyalty.

 Amazon Strategic Management 21

User Experience

Amazon’s large pool of technical know-how on the workings of the database of

ratings and reviews has evolved into a system for a large network of customers (Amazon,

2019). These reviews are vital elements that influence many prospects to use the Amazon

platform to purchase their products. They create a social style to purchasing items on

Amazon and as such, the participatory pool of reviews heighten the digital experience by

building a community, thus dispensing a priceless feeling of belonging to the customer as a

valuable member of the company.

Strategic Challenges

Based on the analysis of both the macro- and micro-environment of Amazon, the

major challenges that the company faces include competitive threats, operational complexity,

and seasonality issues.

Competitive Threats

Amazon faces aggressive competition from giant industry players such as Google,

Apple, and Wal-Mart. According to Aiello (2018), threats from online retail competition,

both in core-eCommerce and cloud services is the leading Amazon’s risk. Although Amazon

is doing well in developing new markets such as Amazon Web Services (AWS) cloud

computing, the industry is confronted with high competitive risks that could dislocate

Amazon’s stock in the short term, especially that three other big establishments in cloud

computing, Google and Microsoft, are fairly comfortable in their market positions. Aiello

(2017) further states that Google could pose a huge threat in cloud computing in terms of

pricing, as the company has the necessary tools to seize Amazon.

Moreover, competition could also hit Amazon in the in its core retail business.

Amazon had a competitive edge over rival traditional retail stores such as Wal-Mart due to its

two-day delivery and low pricing strategy. However, this is not the case now because
 Amazon Strategic Management 22

WalMart also delivers products to its customers in two days without having to subscribe for a

premium membership. Wal-Mart is, therefore, dramatically outstripping Amazon’s core retail

sale.

Operating Complexity

The most recent quarter shows how Amazon’s position as an online retailing giant

across the globe comes at an immense price. The company has to spend substantial amounts

of money on maintaining its significant growth and also to stay a step ahead of the other

major players in the eCommerce industry. Although these investments appeal to the

customers due to the broadened video libraries, elevated product inventory, and speedy

fulfilment networks, Amazon is confronted with a growing amount of operational

complexity. For the last quarter of 2017, the company’s operating expenses hiked 28% to

37.3 billion (Rubin, 2017). The headcount of workers increased to 42% from 2016 to 382,

400 positions, and shipping costs increased by 36% in 2017. As a consequence, Amazon has

had to scale its IT systems, human resources, and infrastructure thereby exerting a pressure

on the firm’s financial resources, personnel, as well as management.

Figure 4: Amazon Operating Costs, Source: (Trading Economics, 2019)

 Amazon Strategic Management 23

Seasonality Issues

Amazon faces seasonality challenges due to the massive influx of orders and traffics

mainly during Q4 of as a result of consumers increased shopping behaviour during the end of

the year. These issues also arise during sometimes of the year, especially during specific

holidays. Amazon has been struggling with speciality strain and has unsuccessfully struggled

with demand for inventory to ensure guarantee enough items, potential hikes in shipping

expenses, slow speed and website outages due to increased traffic, along with additional

staffing demands (Sawyer, 2018). The impact of these issues is considerably elevated during

Q4 when Amazon is required, as per its mission statement, to satisfy customer demand and

expectations. Moreover, the failure of Amazon to restock most demanded products during

specific periods of the year has a potential impact of adversely affecting its earnings growth.

Conversely, overstocking might cause write off that can as well lower profitability.

Recommendations

Amazon should focus its resources on addressing the key strategic challenges

discussed in the previous literature to gain a competitive advantage over its rivals in the

market and also to boost its revenues.

Concerning competitive threats, Amazon should continuously shift ahead of its

opponents by staying focused on what it stands for in the minds of the customers. Ries and

Trout (2010) noted that the basic strategy of positioning is not to create a new product but to

manipulate what already exists in mind, to link the connections that are already present.

Amazon has already established itself as a giant in the online retail industry. However, what

consumers strongly associate the company with is reliable logistics. Amazon can deliver

merchandise from one point to the other, and should continuously make grocery delivery and

shopping as pleasant and efficient as possible. The line between traditional retail and

conventional e-tail is fading, and the dominant player will be the one who excels at the
 Amazon Strategic Management 24

integrations. Amazon should therefore continuously seize and see the opportunities, keep its

lens open wide enough to see consumer issues that other major establishments fo not, and

most importantly, focus on consumer desires.

The other strategic recommendation is that Amazon should cut off its reliance on

FedEx Corp (FDX) or United Parcel Service Inc (UPS) to help solve part of the operational

complexities. Amazon has recently been experiencing issues on scalability, especially in

relation to fulfilment centres. In 2018, the corporation’s fulfilment expenses accrued to $34.0

billion up from just over $1 billion in 2007 (Richter, 2019). Given that Amazon has

announced a one-day delivery promise to its customers, shareholders must demand a

profitable and sustainable shipping service that can accommodate Amazon’s commitment to

its consumers. On this note, Creswell (2018) asserts that neither UPS nor FedEx can offer

such a service. Moreover, the company’s reputation with the two companies has come under

considerable scrutiny in recent months. US president, Donald Trump, said that Amazon costs

UPS taxpayers billions of dollars. In light of these concerns, Amazon should streamline its

fulfilment process, not only internally, but also by doing away with UPS and FedEx.

Amazon can achieve this by creating its private delivery service; this will enable the

firm to retain control over its most essential selling feature, that is, one-day delivery. The

approach could also help Amazon to solve the operational complexities that surround its

service offerings. Contract labour that resembles what Amazon deploys for its one-hour

delivery service could also be adopted in its delivery operations to guarantee flexibility when

the amount of packages varies throughout the year.

Lastly, to solve the seasonality issue, Amazon has to improve on ML and AI

capabilities. In particular, AWS cloud computing can enable Amazon to scale computing

resources upward or downward without much difficulty (Goyal, 2019). The company can use

the technology to allot funds automatically in case of an unprecedented increase in demand

 Amazon Strategic Management 25

and also scale them down when demand falls. AWS technology could also prove useful for

tasks recurring frequently, assignments that are short term and those that are mission-critical.
 Amazon Strategic Management 26

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