Amazon Exploiting Digital Structure

Strategies are integral to success of any company. Strategies are the activities, actions, and moves that a company undertakes to attain its goals, outperform its rivals, win a competitive market position, and attain their strategic vision (Porter, 1996). Amazon.com has been able to maintain its strong position and attain competitive advantage over its rivals due to the strategies that have been implemented over the years.

Concentric Diversification Strategy

Amazon, like many other dotcom companies, experienced significant pressure from Wall Street and shareholders to maximize wealth and generate profit. The ability to achieve this depended on Amazon’s capability to establish a strong position in online retailing. Amazon.com adopted the concentric diversification corporate strategy that allowed them to acquire and create new products and services, thus meeting the expectations and needs of the wide customer base (Ritala, Golnam, & Wegmann, 2014). The adoption of the concentric diversification strategy enabled Amazon.com to continue evolving its business model. After launching the online book retailer in 1995, Amazon.com went ahead to introduce new retail categories, such as DVDs, music, consumer electronics, videos, software, home improvement, video games as well as lawn and patio products. In 1999, Amazon further evolved its business model to include two online auction stores, targeting low-end and high-end and zShops for small merchants.

In 2000, Amazon’s business model further evolved through equity partnerships with brand-name retailer on the online platform with huge revenue generating potential. Through concentric diversification, a firm can transfer skills, expertise, and share facilities while leveraging their core expertise in technology (Muerza et al., 2014). Hence, Amazon has been able to capture synergy and establish an online shopping portal, where “anyone could buy anything, anywhere and anytime” and achieve an online store that is the “Earth’s Biggest.” This strategy has been at the heart of Amazon’s ability to create customer value, grow its loyal customer base, and attain a sustainable competitive advantage over the years.

Overall Cost Leadership Strategy

Another important strategy that has enabled Amazon to remain competitive and profitable is the adoption of the overall cost leadership strategy. Amazon’s cost model is designed to offer an entire consumer experience through significant expenditure on fulfillment cost categories. While the company has significantly invested in distribution and customer service centers, their operation costs are expected to reduce substantially from about 16% to 8%. Although the sum Amazon spent on advertising in 1999 was up (10-11%), the expenditure was well below most of the dotcom companies. It should be noted that one of the reasons for the collapse of the dotcom firms during the 1999‑2001 bubble was the unsustainable costs (119%) spent on advertising. Amazon also had a lower customer acquisition cost (18%) in 1999 compared to the average “Net pure play” cost of 82%. Their system, telecommunication, and content costs were between 8 ‑ 9% but were expected to drop to 3% by 2003, while their merger and acquisition costs were about 8% in 1999. Based on these figures, it appears that Amazon was seeking to develop cost advantage by effectively controlling their cost drivers and ensuring that the cost categories were low or decreased in the long term. Having a cost advantage seems to be working for Amazon as it has been responsible for their increased market share and profitability (Shin, 2001).

Advice and Recommendation for Chief Operating Officer, Joseph Galli, Jr.

While Amazon has been effective in implementing the overall low-cost leadership model, which has proved to be successful so far, the strategy is barely unsustainable in the long-term. According to Dess and Lumpkin (2013), the overall low-cost strategy requires aggressive price cuts and is affected by technological innovations that confer great cost-saving opportunities and can be easily imitated by rivals. Since most of e-commerce retailers are interested in lowering costs, the overall low-cost strategy is unsustainable. Therefore, Amazon should consider implementing differentiation strategy. According to Kumar, Subramanian, and Strandholm (2011), differentiation strategy pegged on core strength and capabilities, brand loyalty and reputation, and patent protection among other dimensions. It is likely to ensure competitiveness and propel a firm ahead of competitors. The implication of this is that Amazon should identify various fronts for providing differentiation including product innovation, customer service, and personnel differentiation. Differentiation strategy would enable Amazon to exploit and harness the value of its digital platform by creating value along its unique brand, loyal customer base, e-commerce expertise, distribution capability, technological innovation, excellent people, and horizontal infrastructure portal.