Strategy in Practice –Amazon

STRATEGY IN PRACTICE – Amazon.com

Introduction to Strategy

In the Words of Johnson & Scholes (2002), Strategy is the direction and scope of an organisation over the long term which achieves advantage for the establishment through its configuration of resources within a changing environment and to fulfil stakeholder expectations. In some respects strategy can be seen as a reflection of the attitudes and beliefs of those who have the most influence on the organisation.

According to Lynch (2000), the essence of corporate strategy is the identification of the purpose of the organisation and the plans and actions to achieve that purpose. Corporate strategy is often perceived as one of the most critical managerial activities that bring together the organisation’s internal resources and its external relationships with its customers, suppliers, competitors and the socio-economic environment in which it exists. In his conceptualisation of the Strategy concept Lynch (2002) clearly identifies three distinct aspects that have been discussed below:

  1. Resources Strategy – Companies, Businesses and firms hold or acquire a wide range of resources. A firm’s resources and capabilities include all the financial, physical, human and organisational assets used by a firm to develop, manufacture and deliver products or services to its customers Barney (1991). The purpose of strategy is to make the best use of the available resources so as to outperform competition.
  2. Environmental Strategy – The term environment includes every aspect external to the organisation. No organisation can gain competitiveness with a lack of vision for its environment. Focus that is restricted merely to what lies inside the boundaries of the firm is best criticised as incomplete and insufficient. Organisations need to and must be in synchronisation with their surroundings. It is here that strategy comes to play a major role.
  3. Adding Value – Lynch has stressed on the notion of value addition. Apart from the above corporate strategy must meet the need to add value to the supplies brought into the organisation. To ensure its long term survival, the organisation must take the supplies, add value to them through its operations and then deliver its output to the customers. The purpose of corporate strategy is to bring the conditions under which the organisation is able to create this vital additional value. It must also ensure that the organisation adapts to the changes in the environment so that it can continue to add value in future.

In essence Strategy provides Decision Support (Grant, 2004) “to the extent that decision makers are limited by bounded rationality, strategy in the form of guidelines and decision criteria can enhance the quality and consistency of strategic decision making. It also helps in better decision making by pooling together the knowledge of many individuals and by facilitating the application of various analytical tools.

Strategy also acts as a Co-ordinating device. The many tools and components of strategy i.e. Vision, Mission, Objectives etc. bring together the entire organisation as a single locomotive headed in one direction. With all departments and personnel aiming towards the common goals, co-ordination can be achieved with greater ease. Strategy provides the organisation a target to work for. Strategy is forward looking; it establishes a direction to guide actions. It also sets aspirations for the company that can act as motivators for the whole organisation.

The strategy function, as is evident from above, permeates through all organisational membranes to pervade into all levels and is not restricted to any particular zone. Practically all authors in field of Strategic Management acknowledge the prevalence of varied levels of strategy. Johnson & Scholes (2002) believe that Corporate level strategy relates to “the overall purpose and scope of an organisation and how value will be added to the different parts (business units) of the organisation. It is also likely to be concerned with the expectations of the owners. It is the basis of other strategic decisions and may well take the form of a mission statement.” Corporate strategy deals with the ways in which a corporation manages a set of businesses together. (Grant, 1995)

Business unit strategy is about how to compete successfully in particular markets. Business Strategy deals with the way in which a single business firm or an individual unit of a larger firm competes within a particular industry or market.

Operational strategies are concerned with how the component parts of an organisation deliver effectively the corporate and business level strategies in terms of resources, processes and people. They deal with the day-to-day working of the various sections in a firm. Operational strategies are more about implementation than planning.

Thus, “Strategic management involves understanding the strategic position of an organisation, making strategic choices for future and turning strategy into action.

The strategic position is concerned with the impact on strategy of the external environment, internal resources and competences and the expectations and influences of stakeholders.

Strategic choices include understanding the underlying bases for future strategy at both the corporate and business unit levels and the options for developing strategy in terms of both the directions and methods of development.

Strategy into action is concerned with ensuring that strategies are working in practice.” (Johnson & Scholes, 2002)

This report aims to analyse the strategy in practice at Amazon.com. Amazon.com is one of the most successful e-businesses and undoubtedly the champion of all online retailers or e-tailers as they are often referred to. It has revolutionised the retail sector of business and is a subject of innumerable studies and research in the current e-commerce era.

The material used for study has been drawn from the Amazon.com case study[1] and the web based portal for the company Amazon.com[2]. The report shall use existing theory as a basis to realise how strategy has worked for Amazon.com in practice. Although it is challenging to capture every aspect of the organisation’s life so far, effort has been made to cite relevant examples so to get a glimpse of its strategic approach.

The Amazon.com Case

A summary[3] of the Amazon.com case shall prepare the grounds to lay the analysis in the light of theories discussed. A number of strategic concepts shall be cited to gain deeper insights to particular issues.

With the explosive growth in internet companies’ market capitalisation positions, one would ask if some hype is at play. But the trend data clearly reveal that the internet is for real. According to Forrester research the total value of goods and services purchased online exceeded US$43 billion in 1998. Amazon.com believes that it is well positioned to capitalise[4] on this growth.

According to Media Metrix 16% of web users visited Amazon.com’s stores in December 1998. ‘In a very short period of time Amazon.com has become one of the world’s most recognised brands’, said Jaleh Bisharat, Vice-president, Marketing, Amazon.com.

With Amazon.com’s current strategy combined with the ongoing recruitment of entrepreneurial top management team for each business segment, the challenge for Amazon.com is on the strategic implementation front.

Bezos had always been fascinated with technology. He came up with the statistic that the electronic world would grow at the rate of 2300% monthly. Bezos said, when something is growing that fast, every second counts.

Bezos considered selling a variety of products online, but he settled for books because the worldwide market is large, the price point is low and the range of titles is large.

Being unsure of the ideal location, Seattle was chosen because it was the location of book distributor Ingram, which has continued to provide 60% of Amazon.com’s books. Seattle also provided a favourable sales tax climate and a high-tech workforce.

I know nothing about the book industry…I can get them to the customer and forget about bricks and mortar”, said Bezos in an attempt to raise funds for his venture.

After its entry into the market, Amazon.com had no significant rivals and there were no dominant traditional players. Even at this time Amazon.com was providing a powerful search facility as well as a host of services not provided by other online competitors. Analysts warned of a volatile internet sector with strategic plans constantly being revised.

Despite aggressive competitive entry, Amazon.com passed many milestones in 1997. The most notable of these was its ability to raise net proceeds of almost US$50 million in May. This enabled aggressive investment in building the business.

Amazon.com focussed on establishing its executive team, which included the recruitment of Richard Dalzell of Wal-Mart. In the same year, 1997, Amazon.com offered the lowest book prices anywhere in the world.

Extensive promotional relationships with other dominant internet players were concluded which reinforced Amazon.com’s momentum, e.g. Yahoo!, Excite, AOL etc.

In 1998 the company launched music, video and gift stores in the US and expanded operations to UK and Germany. Jimmy Wright of Wal-Mart joined the company in the same year.

Amazon.com’s expansion programme is evidence of a growth strategy via acquisitions, strategic relations and internal development. It received the Computerworld Smithsonian Award for having demonstrated vision and leadership in the innovative use of information technology. With its highly qualified top management team and the success trends, Amazon.com continued to enhance the total customer experience of shopping, giving them wider product range to choose from and more sophisticated services to complement them.

The case study then goes on to list the various achievements of the company. It also provides detail information on the financial and personnel aspects of the organisation. These details have been passed over as they are beyond the scope of this paper.

The Analysis of Strategic Practices

The Basic Approach

The Internet is one of the most fascinating products of the developments in information technology. It received mixed reactions from the public and the entrepreneurs. While most of them were overwhelmed with the possibilities and others called it “an over hyped mania”, only a few saw it as a business opportunity. Jeff Bezos had the vision that created “Ex ante limits” to competition (Peteraf, 1993) and gave Amazon.com the “First-mover advantage”.

Among the various lenses or attitudes towards Strategy that have been theorised, Amazon.com’s approach can be regarded as that of an Ideas lens. The ideas lens (Johnson & Scholes, 2002) sees strategy as a result of new ideas that can come from anywhere in the organisation. It promotes innovative thinking and does not inhibit experimentation. This is well evident in the very start-up of Amazon.com as an enterprise. Further, this approach is better characterised as “Emergent” than “Prescriptive” (Lynch, 2000). The dynamic nature of the internet environment makes a planned and prescribed approach unsuitable. Amazon.com’s strategy evolved largely during the course of its life depending on its position at that instant in time. In the words of Miles & Snow (1987) Amazon.com as an entity is a “Prospector” who looks for new opportunities and is willing to take risks to be able to exploit the same. Stated in general, Amazon.com’s strategy is an ambitious one.

Pattern of Strategy development

In his business development Bezos attempted a “Transformational change” in strategy through the creation of an entirely new service. The change resulted in success because it created new expectations that did not exist earlier; Amazon.com was ahead of its time. Further, the ability to convert the transformational change into a business winner comes from the fact that as the strategy for the firm was emerging, there was little mismatch between the intended and the realised strategy (Mintzberg & Walters, 1985). It is important to strike harmony among the understanding of the environment, identified opportunity, the strategy intended to capture such opportunity and finally the actual resultant strategy that was implemented. Without this happening, the transformational change would most often end in a failure.

Stakeholder Mapping

Stakeholders are those individuals or groups who depend on the organisation to fulfil their own goals, and on whom in turn the organisation depends” (Johnson & Scholes, 2002). For Amazon.com the major stakeholders were its customers, investors and Jeff Bezos himself. With respect to the Stakeholder Mapping drawn up by Savage et al (1991) Bezos and the investors can be referred to as “Dominant Stakeholders” while the customers would identify as “Dependent Stakeholders”.

Environment

The internet industry is characterised by a high degree of “Changeability” (Lynch, 2000) i.e. there is a greater number of new problems and each problem is more complex than in other sectors. Moreover it is not very “Predictable” due to a high rate of change and uncertainty of future circumstances. This made Amazon.com’s business environment highly turbulent. As a new entrant Amazon.com had to cope with all these difficulties; but once settled these factors acted as “Barriers to entry” (Porter, 1985) for its competitors.

Culture

Culture within an organisation consists of the shared basic assumptions that have worked well enough to be considered valid and passed to fellow employees over time (adapted from Schein, 1985). It refers to “the way we do things around here”. While there can be several factors affecting the culture at a work place, in case of Amazon.com it is the ownership and technological factors. Jeff Bezos is the leader of the organisation and also the cultural head bringing in ambition and motivation to the organisation. The work practices, routines, plans, the entire business is largely governed by the technological abilities inside and the advancements outside the organisation.

The Cultural web is another important aspect that has a definitive impact on the strategy an organisation pursues. The Cultural Web (Johnson & Scholes, 2002) consists of the Routines & Rituals, Stories, Symbols, Power Structures, Control Systems and the Organisational Structure. For Amazon.com its brand name acts as a major symbol that binds together the various components of the system. It symbolises the scale of operations that Bezos aimed at, thus cultivating an aggressive work culture. If one was to draw out the power structure at Amazon.com, it would be a flat pyramid with Jeff Bezos at the peak. Although the investment came from outside, Amazon.com was his dream and “his” venture. He did not promise any profits in the first 5 years, but his faith in the idea won the investors’ confidence. All this clearly indicates the prevalence of a “Power Culture” at Amazon.com (Handy, 1993).

Key Strategic Highlights

Based on its first mover advantage Amazon.com was able to capitalise on the heterogeneity of its resources. It reaped benefits from the Ex post and Ex ante limits to competition (Peteraf, 1993). Its technological knowledge behind the search engine was imperfectly imitable for the competitors. Even if the rivals came up with substitute systems, the “first mover” position always allowed an edge in favour of Amazon.com. Employees and technicians at Amazon.com learnt to adapt and innovate better than the competitors, simply because the latter were merely copying what Amazon had done.

The Knowledge at Amazon.com was rare, valuable, not easily imitable and well organised to allow the company to enjoy a resource based competitive advantage over its rivals (Barney, 1995).

The technological skills were Amazon.com’s core competence that was used to create the Search facility – their core product which was at the heart of Amazon’s web based store/services – the end product (Hamel & Prahalad, 1990). However, it also needs to be mentioned here that the Amazon.com was rich in dynamic capabilities (Teece, 1997) to be able to successfully carry out the above. The top management team which consisted ex-Wal-mart employees, were aware of their strengths as well as the business environment to be able to identify their core competence. They ensured carrying out the best use of their resources and maintained the momentum gathered from the initial push. Even with the best resources and opportunities a business may not succeed, if those managing it are not aware of their responsibilities. It is the management that lays out the strategy and takes all decisions that are critical to the overall success.

Expansion

Given the knowledge of Ansoff’s Matrix Amazon.com for a start pursued Market development i.e. offered the existing products to new markets. It also used Cost leadership (Porter, 1985) to expand its customer base. As the website served more and more customers over time, Amazon.com introduced new products to the existing market – a product development effort. Finally, with a secure market position Amazon.com was capable of Diversification i.e. offering new products to new markets.

Not all of Amazon.com’s offerings were indigenous. It had partnered with several other wed based companies. While most of the early partnerships were aimed at gaining a greater exposure to the target audience, later excusive relationships were created to add to the existing list of products and services that were offered on the website. The motive behind these alliances was largely “Exploitative” (Koza, 1998). Such business alliances were primarily aimed at tapping into each others’ customer bases and render mutual benefits to the parties involved.

Amazon.com’s approach to collaboration is well explained by the M-B-A (Make, Buy, or Ally) matrix. It allied with services such as Yahoo and Excite because the service was not important to Amazon’s business – it sought more traffic. However, in case of similar companies such as Bookpages and Telebook, Amazon.com preferred a “Buy” because of the importance to the business activity. It also had the requisite skills to run these companies. Amazon.com did not want to allow these smaller companies to grow and later pose a threat to them.

Conclusion

Amazon.com can be easily regarded as a strategy champion. It had all the components of a great Entrepreneurial tale, and shall be cited in many more academic works in future. However, it must not be overlooked that for the first five years Amazon.com did not make any profits. Moreover, with the growth in market share, loss per share also grew. If all other competitors would have grouped together to attack Amazon from all fronts, it could have been a different story.

Essentially, Amazon’s first mover advantage was crucial. The fact that Amazon possessed the above resources and capabilities at the emergence of e-commerce is of vital importance. Therefore, it is questionable whether or not Amazon would have managed to achieve similar results if it were to launch today in 2004 in such a hypercompetitive market. Primarily, Amazon’s success was due to effective leveraging of its resources, especially knowledge and managing the capabilities derived from these resources.

REFERENCES

  • Barney, Jay B.. – Firm resources and sustained competitive advantage From: Journal of management vol 17 (1) 1991 p.99-120.
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  • Johnson, Gerry. – Exploring corporate strategy / Gerry Johnson, Kevan Scholes. – 6th ed.. – Harlow : Financial Times/Prentice Hall, 2002.
  • Lynch, Richard L.. – Corporate strategy / Richard Lynch. – 3rd ed. – Harlow : Financial Times Prentice Hall, 2003.
  • Mintzberg, Henry. – Strategy safari : the complete guide through the wilds of strategic manage… – Harlow : Financial Times Prentice Hall, 2001.
  • Mintzberg, H. and Waters, J.A. – Of strategies, deliberate and emergent Strategic management journal. – John Wiley and Sons Inc. Vol 6 (1985) p.257-272
  • Peteraf, M. – The cornerstones of competitive advantage: a resource-based view Strategic management journal. – John Wiley and Sons Inc. Vol 14 (3) 1993 p.179-191
  • Porter, M.E. – From competitive advantage to corporate strategy. Harvard business review – Harvard Business School Publishing Corporation, 1987
  • Prahalad, C.K. and Hamel, G. – The core competence of the corporation Harvard business review. – Harvard Business School Publishing Corporation. Vol 68 (3) 1990 p.79-91
  • Schein, Edgar H. (Edgar Henry), 1928-. – Organizational culture and leadership. – 2nd ed. – San Francisco, Calif. : Jossey-Bass, 1992. – (Jossey-Bass management series).
  • Teece, D. et al – Dynamic capabilities and strategic management Strategic management journal vol 17 (7) 1997 p.509-533
  • Whittington, Richard, 1958- – What is strategy – and does it matter? / Richard Whittington – 2nd ed – . – London : Thomson Learning, 2001 – – 1861523777

Footnotes

[1] Amazon.com – from start up to the new millennium, Stockport & Street in Johnson & Scholes (2002)

[2] www.amazon.com

[3] This is a self prepared summary using the information provided in the Amazon.com Case study by Stockport & Street. The purpose of the summary is informative and allows connection with the report – it has therefore been included in the main text.

[4] Such text in bold are exhibits of strategic highlights

Bill Carlson

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