Amazon has initiated the shift to pay at a minimum employees $15 dollars per hour and employees already in that pay scale would see a $1 hourly rate increase. This increase in pay however came as a surprise to ware house workers because two days later Amazon said that it would fund the increased hourly earnings by eliminating the stock awards program as well as the company’s Variable Compensation Pay program (VCP). This program gave hourly employees the ability to earn an additional 8% bonus to their monthly income. A lot of veteran employees have lost faith and experienced a reduction in morale from the October 2018 pay announcement. It might have negative preconceived notions for veteran employees because Amazon stock has seen growth by a factor of four since 2015.

Amazon has adopted the related corporate diversification business strategy where less than 70% of its operating income comes from any one main channel of product or service. As a whole the parent company is very diversified with its e-commerce sector (Amazon North America) accounting for $7.27 billion dollars of operating income in 2018. Amazon Web Services generated $7.3 billion dollars of operating income for 2018.

Amazon continues to diversify as it acquired Whole Foods in 2017 bringing in just over $4 billion dollars of revenue and now Amazon is planning to offer free one day shipping to Prime members through its own in-house courier service. The one day shipping is a serious threat for traditional brick and mortar stores.

As of February 2018, Amazon began to offer its own delivery service in Los Angeles. This announcement most likely came as a surprise to UPS and FedEx. The announcement sent the market share value of the two shipping companies down. This vertical integration strategy directly competes with its shipping suppliers. This has been Amazon’s approach since it’s inception.

Companies like UPS where a Union workforce maintains a strong presence can put up barriers reducing the companies ability to innovate and invest in disruptive technologies. Ultimately, this unwillingness to adapt and change as an organization with the times has caused large leading companies such as Sears and Toys-R-Us to lose their competitive advantage go out of business.

Amazon has also done this with its Amazon Web Services. It developed the technology to the point where it considered appropriate and then opened the services up to Netflix and other firms to reduce the price of continued operations and make the business model more efficient. Amazon has become a master of scaling up operations through expansion and then offering those services to other potential customers.

Strategic alliances are where two or more firms in an industry agree to work together to reach a common objective increasing economic profits but not reducing industry competitiveness.

Amazon Web Services (AWS) and Salesforce as of September 2018, have significantly expanded their strategic alliance to simplify product integrations across both businesses. This strategic alliance will change how customers synchronize and share data across both services further securing the transmissions and simplifying the input processes.

Netflix is another strategic partner of AWS. Their dependency on Amazon’s servers continues to only increase as more subscribers begin to use Netflix’s online internet streaming services. They have made Amazon billions of dollars of revenue from utilizing their servers. Netflix accounts for 15% of the entire world’s downstream internet bandwidth usage as of October 2018 and a majority of the hosting services are utilized from AWS. During peak hours that bandwidth percentage can increase as high as 40%!

Amazon is an incredibly large empire. Since its founding twenty-four years ago it has entered over seventy-eight different segments of business. Coined the “everything store” Amazon occupies so much space that it could take up thirty eight pentagons! Amazon is in fashion, advertising, e-commerce, books, delivery, media (Prime Video, Audible, & Kindle to name a few), healthcare, home services, groceries (Whole Foods & Amazon Pantry), web services, energy and transportation, robotics, and hardware (Lab126).

Amazon has ultimate flexibility when it comes to the ability to change directions quickly and with a low cost. The Amazon Fire Phone was a total bust and the company took a $170 million dollar hit for the commercial failure.

Product differentiation is where a business attempts to gain a competitive advantage through offering superior products or services to increase customer willingness to pay a price premium. Amazon is a bit of a hybrid business model somewhat focused in between product differentiation and cost leadership.

What sets Amazon apart from other competitors is its outstanding customer service, free Prime two day shipping distribution channels, and Amazon Basic product offerings. Amazon Basic products are new Amazon branded equivalent products offered at a lower price point to customers.

There are principles of strategy when it comes to business, cost leadership and product differentiation; product differentiation will be discussed in next weeks blog. Cost leadership strategy is when a firm focuses on gaining a competitive advantage through keeping its economic costs down for producing product.

In Amazon’s case they don’t actually produce product but rather offer and distribute on a global scale through supply chain channels. The main advantages that Amazon has over typical brick and mortar stores while keeping costs low are by operating from massive warehouses and powerful processing capabilities; a physical economy of scale.

What are Amazon’s resources and capabilities to give them a sustained competitive advantage? Amazon as a large organization is continuing to expand through acquiring other companies through business acquisitions.

Value

Amazon’s nearly limitless resources afford it the opportunity to respond to threats and business opportunities (acquisitions). They continue to expand with new technology and with the opening of additional fulfillment centers.

Rarity

Product distribution is a rare commodity of Amazon. They have now begun purchasing vans for use in their delivery service for two day Prime shipping. No other competitors have a presence in product delivery service; they all contract it out to couriers.

Imitability

Many of Amazon’s fulfillment centers and online product distribution channels may be imitated. It is the Prime video, free two day shipping, and reputation that would prove difficult to be imitated.

Organization

Amazon is fully invested in the technology sector of their business; they were even exploring the idea of using drones to deliver packages to customers. There are strong inventory control and product delivery systems in place.

Amazon Inc., headquartered in Seattle Washington, is the second largest employer in the United States, It operates its business in sixteen countries where items can be shipped to over one hundred different countries.

In 2017, $550 million dollars were invested in Italy to build a substantial presence. E-commerce sales are expected to grow 17% year-over-year with already over $20 billion in sales as of 2016.

Eleven months ago Amazon launched the new international shipping mode. This made it possible for customers, who live in remote areas, where Amazon does not maintain a presence the ability to order products. The product range initially is limited, but more products should be added with time. Forty-five million products are shipping globally from U.S. sellers.

“An environmental threat is any individual, group, or organization outside the firm that seeks to reduce the level of that firm’s performance.”

Using Porter’s five forces competitive model we will explore the risks associated with Amazon and these connected five forces.

Threat of Entry

For Amazon their portfolio is becoming so large through the products and services that they now offer the threat of entry would be low. In Gaining and Sustaining Competitive Advantage fourth edition Jay Barney mentions that for Amazon’s online bookstore Barnes and Noble and Borders are new competitors to the book selling industry; this is only one aspect of Amazon’s business portfolio so the risk to their business is low.

Threat of Rivalry

The threat of rivalry is always growing for Amazon. Retail stores such as Costco, Walmart, or Best Buy offer aggressive prices and sales to entice customers. Walmart although late to the game has now begun offering e-commerce on their website to directly compete with Amazon. There is a relatively low switching cost for customers based on the availability of products offered at brick and mortar stores.

Threat of Substitutes

This is a very real threat to Amazon’s success. There is a high availability of substitute products offered through other channels i.e. Walmart’s e-commerce website and eBay and based upon product substitution availability puts the purchasing power back in the hands of the customer.

Threat of Powerful Suppliers

Small populations of large equipment manufacturers can directly impact Amazon’s bottom line through the cost of running its e-commerce operations. The threat of suppliers is a moderate force because of a moderate size of suppliers and moderate forward integration.

Threat of Powerful Buyers

In today’s digital age, access to high quality information empowers the customer. Access to product information and item availability are critical for Amazon with regards to the bargaining power of its customers. This high quality information access provides consumers with equivalent substitute products offered by Amazon’s competitors and provides a low switching cost alternative.