How did the companys strategy change over time. Within the first six years of its inception, Amazon transformed itself from an online bookstore into an online superstore selling a wide variety of products both nationally and internationally. By 2000, Amazon was ranked as the 48th most valuable brand worldwide. Amazon’s journey is a classic example that demonstratesritu how a company’s business model can be aligned with its environment to take advantage of the opportunities and to be able to create greater value for all its stakeholders. Amazon set out with the strategy of becoming “Earth’s Biggest Bookstore” and to support its rapid growth it aligned its business model to “get big fast.” Initially Amazon took ownership of the inventory it sold, and as its product line expanded, so did the complexity of its warehousing, inventory, management, distribution, and fulfillment. In order to support its rapid growth Amazon invested heavily, both, to quickly build a state-of-the-art digital business infrastructure and operations (that provided it end-to-end visibility) and also a network of worldwide distribution centers. Realizing the future growth potential, Amazon built its distribution infrastructure with ample overcapacity. In 2000, in order to leverage its assets, and to create for itself a strategic advantage, Amazon added the “infrastructure services” business model, thus transforming itself from an online retailer to a commerce platform.
B. How did the capabilities evolve?
Capabilities enable a company to execute its current strategy and also provide a platform for future growth. Amazon used its IT capability as a powerful tool to enable operational cost savings, revenue growth opportunities, drive asset efficiencies and to create for itself a sustainable advantage.
Stage I: Using IT to drive cost savings: Amazon used IT to control and bring down its raising fulfillment costs by computerizing and interconnecting even the notoriously labor-intensive activities like picking and packaging.
Stage II: Using IT to drive revenue growth: Amazon used IT to create business intelligence to get to know its customers, markets and competition better and leveraged this capability to increase its revenues by attracting more customers and also by increasing the per customer purchase value.
Stage III: Amazon created for itself a unique asset base comprising of its brand, customer relationships, the technical and fulfillment infrastructure, and leveraged it to create for itself a capability that could not be easily imitated by its competitors (online and traditional) or new entrants.
Stage IV: Using IT to create sustainable advantage: Amazon’s digital business infrastructure, which linked its customer facing processes to its backend processes, helped it create a sustainable advantage for itself which served as an entry barriers for competition. The IT enabled commerce platform that Amazon built for itself is the key to its success.
C. What value did the company deliver to all stakeholders?
At the heart of Amazon’s value proposition is the fact that it leveraged its existing IT system and transformed it into a commerce platform, and this allowed Amazon to pursue new IT enabled strategic growth initiatives. In this process Amazon created value for all its stakeholders.
Customers: Amazon’s sophisticated browsing experience with enhanced search capabilities, wish list, recommendations, shopping carts, one click shopping, personalized consumers shopping experience.
Industry: Amazon’s business concept not only helped Amazon grow, rather it developed a value network for all the industry participants. Amazon’s adoption of digital business capabilities compelled the retail industry to adopt and grow, or at least consider the new business model.
Shareholders: In the early years, since Amazon had fewer physical assets, its asset turnover was extremely high. As Amazon.com began investing in its IT infrastructure and distribution network it increased its asset base and therefore had to look for new avenues to increase its revenues and to fuel its evolving business model.
Do you agree with the decision to pursue the Toys R Us deal? Why did the company do the deal? Should they do more deals like this?
By 2000 Amazon had transformed itself into a commercial platform which allowed it to leverage its assets utilization while adding to its revenue and growth potential. Amazon’s decision to pursue the Toys “R” Us deal was a right step for various reasons. Firstly, the deal with a traditional “brick-and-mortar” retailing partner like Toys “R” Us would help Amazon hedge its business risks as opposed to the volatility of partnering with other dot-come retailers; Amazon had learned this form its experience of partnering with other dot-com retailers many of which succumbed to the internet bubble. Secondly, it would allow Amazon to increase its revenues by building on its core competency (distribution and fulfillment capabilities) and by increasing customer loyalty by providing a better shopping experience to its consumers. Further, it would allow Amazon to increase its operational efficiencies as Toys “R” Us would “own” the inventory and maintain control of product sourcing and marketing; this would free up Amazon’s capital investments which it could put into other growth projects. Amazon should definitely entered into more of such deals as this would help address the scaling inefficiency that it was experiencing in its supply chain, inventory management, and order fulfillment processes.
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What impact does the Toys R Us deal have on Amazon’s business model in early 2000?
In August 2000, Amazon’s partnership with Toys “R” Us enabled the company to exploit its new commerce platform and to operate as a logistics service provider. Amazon added the “infrastructure services” business model to its existing retail, marketplace, and auctions business models. The Toys “R” Us deal served as a great learning opportunity for Amazon and impacted its business model in a number of ways. It allowed Amazon to expand into traditional retailers market. This deal provided Amazon the opportunity to leverage its core assets (its customer base, scalable commerce platform, logistic capabilities – customer service and distribution centers) while improving its operating efficiencies. Not having to invest in the inventories helped Amazon to free up its inventory investment costs, it also helped Amazon scale its operating capabilities and costs, proactively used its capacity and further reduce its customer acquisition cost. Amazon earned a margin on the customer service, inventory management, fulfillment, and logistics services that it provided while the inventories were owned by Toys “R” Us. This positively impacted Amazon’s cash flows as it got paid directly by the customers, earned margins on the services that it provided before it reimbursed Toys “R” Us for the inventory sold.
As a member of the Amazon.com board of directors in early 2001, what challenges did the company face and what actions would you take?
Two of the biggest challenges that Amazon faced in early 2001 were whether it’s new “infrastructure services” model could develop into a competitive advantage that would be difficult to imitate by the competition and how to guard itself from increasing competition from traditional retailers.
One way to deal with competitive threats from traditional retailers is to build an alliance with them. Amazon should continue to expand in the traditional retail market by attracting more retailers to sell to their products using its commerce platform. Teaming up with traditional retailers would require a delicate balance as it is important that this alliance between Amazon and its retail customers represents a win-win scenario. This will help Amazon use its fixed cost distribution network to capacity thereby increasing its benefits of scalability. Further it would allow Amazon to leverage its capabilities, increase revenues and develop its commerce platform into a strategic advantage that would be hard to imitate by new entrants or by traditional retailers.
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