Strategic Alliances

In 2013, Amazon entered into a strategic alliance with Proctor & Gamble. Strategic alliance is a cooperative strategy. It exists whenever two or more independent organizaions cooperate in the development, manufacture, or sale of products or services. So, both Amazon and P&G maintain their autonomy, but they still gain a new opportuntiy.

In this partnership, Amazon uses a portion of P&G's warehouses for packaging and distribution of only P&G products. As a result, Amazon gets quicker and cheaper distribution (that's one less trip the goods have to make) and Amazon can use their original warehouse space for higher-margin items (P&G focuses on consumer goods like diapers and toiletries). P&G benefits by cutting their transportation costs (again, that's one less trip the goods have to make), as well as having Amazon promote their products online (equaling higher sales).

Note that there are three diferent types of strategic alliances:

1. Nonequity
2. Equity
3. Joint venture

What Amazon and P&G agreed to would fall under a nonequity strategic alliance, as they did not take quity positions in each other; it is more of a contractual alliance, not a formal legal partnership, as the other types are.

By 2015, P&G ranks on the first page of results on Amazon.com for over 40% of its individual products, and close to a third of its products are among the top 50 in their category in the number of reviews per listing on Amazon.

It's important for both parties in a strategic alliance to feel like they are benefitting; when the relationship is one-sided or mis-balanced, trouble can ensure... And this includes all stakeholders involved, like suppliers and retailers.

Such is the case with Target. Their reactin to the Amazon/P&G strategic alliance was to, essentially, punish them. To Target, they perceived the strategic alliance as favoritism. So, in 2013, Target moved P&G's products to less-prominent spaces in stores and started working directly with other suppliers to boost their sales (versus P&G's).

If strategic alliances can be as beneficial to Amazon as it has been with P&G, we should keep an eye out for similar partnerships... and what suppliers and retailers have to say about them...

Sources:

• Gaining and Sustaining Competitive Advantage by Jay B. Barney [textbook]
• Amazon Makes Strategic Alliance with Procter & Gamble by evigo.com [http://evigo.com/6627-amazon-makes-strategic-alliance-with-procter-gamble/]
• P&G Gets Caught in Rivalry Between Amazon and Target by Jeremy Bowman [http://www.fool.com/investing/general/2015/03/06/pg-gets-caught-in-rivalry-between-amazon-and-targe.aspx]
• P&G’s Strategic Partnership with Alliance by bmcrosby [https://bmcrosby.wordpress.com/2012/04/13/pgs-strategic-partnership-with-alliance/]

Implementing Corporate Diversification

Amazon considers its unrelated corporate strategy a competitive advantage because it's valuable, rare, and costly to imitate. In order to not squander its potential (and its profits), Amazon has to ensure it is appropriately and efficiently organized.

To achieve this, Amazon uses an M-form, or multidivisional structure. This structure is made up of multiple divisions (profit and loss centers), each with a vice president that reports directly to the CEO. Amazon defines its divisions by the different products and services it offers, so that the vice presidents can focus on their respective products and services. Since Amazon is such a large organization, this is the most beneficial, flexible set-up. (Other options would be to divide by brand name or geographic area.) Also, because Amazon is so large, dividing the company in this manner can help give outside equity holders a birds-eye view of each vice presidents' decision-making activities (monitoring), reassuring them that the decisions are consistent with their interests (bonding).

Below is how it would appear in the annual report (the board of directors, the senior executive, corporate staff, division general managers, and shared activity managers --- discussed below). To put it in scope, Amazon has over 51,300 employees globally, spanning corporate offices, fulfillment centers, customer service centers and software development centers across North America, Europe, and Asia.

The board of directors
One of the major monitoring devices is the board of directors, to whom all senior managers report. Their primary responsibility is to monitor the decision-making int he firm to ensure that it is consistent with the interests of outside equity holders. Amazon's board of directors is organized into several subcommittees: The audit committee is responsible for ensuring the accuracy of accounting and financial statements; the personnel and compensation committee evaluates and compensates the performance of senior executives and other senior managers; and the nominating committee nominates new board members. (In fact, Amazon has been recognized for the two women they have serving on their board.)

The senior executive
CEO Jeff Bezos has two main responsibilities: strategy formulation (focuses on which businesses Amazon should compete in and how... Essentially defining the economies of scope) and strategy implementation (focuses on encouraging appropriate cooperation among divisions in order to exploit valuable economies of scope). These two implementations come together to assure investors that Amazon's strategy is profitable, cannot be duplicated, and has strong operations and activities.

Corporate staff
The primary responsibility of the corporate staff is to provide information to the CEO about external and internal environments. This role is especially important because it assists the CEO in making good decisions about the strategy formulation and implementation; they are essentially the compass.

Division general managers
Primarily responsible for the day-to-day activities, and have full profit-and-loss responsibilities. They choose strategy formulation for their direct reports, aligning it with the CEO's. Their strategy implementation responsibilities parallel the CEO's. Since they must align the with CEO as well as the multiple functional managers that report to them, there is a lot of coordination that goes on before implementing anything. Additionally, they fight for corporate capital (by generating a high rate of return) and cooperate with other division general managers to exploit corporate economies of scope. Although the division general managers are competing for capital, they do understand that, if each division sees high levels of economic performance, then Amazon, as diversified as they are, is more likely to do well as a whole, too.

Shared activity managers
Common sales forces, common distribution centers, common manufacturing facilities, and common research and development efforts can help multiple stages of Amazon's value chain, even though they are inherently diversified. This is often obscured in a traditional annual report, so the below is redrawn to emphasize roles and responsibilities. The corporate staff groups are separated from shared activity managers, and each is shown reporting to its primary internal "customer," or the CEO/two or more division general managers.



See that the following analysis is apparent:

CEO and founder Jeffery Bezos and an eight-member board of directors sit at the top and monitor all activities below them. The CEO oversees the Chief Financial Officer (CFO), the Chief Technology Officer and the following 8 departments: Business Development, eCommerce Platform, International Retail, North America Retail, Web Services, Digital Media, Legal & Secretary, and Kindle. The CFO oversees the Real Estate and Control department. International Retail oversees three separate departments: China, Europe and India. North America Retail oversees the following five departments: Seller Services, Operations, Toys, Sports & Home Improvement, Amazon Publishing and Music & Video. The Web Services department oversees Amazon S3 and Database Services. Other departments include Product Development & Studios, Europe Operations, Global Advertising Sales, Computing Services, and Global Customer Fulfillment.

Sources:

• Gaining and Sustaining Competitive Advantage by Jay B. Barney [textbook]
• Amazon 05 - Diversification Strategy by Pere Joan [http://www.slideshare.net/PereJoan1/amazon-05-diversification-strategy]
• EST 325: Amazon.com by Fabrice Guillaume [https://stonybrook.digication.com/fguillaume/Organizational_Structure1]
• Amazon.com Board of Directors Committee Membership by Amazon.com [http://phx.corporate-ir.net/phoenix.zhtml?c=97664&p=irol-govmanage]

Amazon's (Rare) Unrelated Diversification Strategy is a Worry

Diversification is a corporate strategy in which a firm brings multiple businesses within its boundaries. Firms may vary in the extent to which they diversify the mix of businesses they pursue, and this is usually decided by their relatedness.

For Amazon, they have an unrelated corporate diversification. This means that they pursue numerous different businesses, and there are little to no linages between them. Consider their foray into cloud services, electronics (including their home-grown Kindle), toys, tools, kitchenware, and more. Plus, their sub-sections like Amazon Web Services, the Fire phone, the FireTV, Amazon Fresh, and partnership with multiple online stores (like Zappos). CEO Jeff Bezos is doing everything in his power to realize his goal: to be the internet's one-stop shop. See below for how fast they have grown.

Unfortunately, to stay ahead of competitors, Amazon must be a first-mover, which often means not waiting for a profit to turn before jumping into another product category... or having any experience in it. For as many sales as Amazon gets (almost $1billion in only the Christmas season), they barely turn a profit. They expand per opportunity versus financial ability... Just as most unrelated diversified firms are. They are more cost-burdened than their counterparts that choose a related diversified strategy.

For example, choosing such a strategy means they have too many products to put into a single diversification center. It takes an average of 3.67 shipments to complete one order (called "split shipments"). Additionally, new markets don't sell themselves; Amazon needs to continually increasing their marketing budget as they increase their product range.

Motivation could include risk reduction, tax advantages, exploiting market share, growing firm to increase employee compensation. Typically, the value created by these for unrelated diversification is quite small;investors don't take kindly to a "sales before profit" mindset. This is why research generally shows that related diversified firms outperform unrelated diversified firms; they have a "profit before sales" mindset.

However, Amazon has gained a customer base and analytics into shopping habits that no other retailer (both online and physical) can match. And they show no sign of scaling back their diversification. Hopefully those two premises can find a way to work together to produce an easily-profitable and sustainable company.

Sources

• Gaining and Sustaining Competitive Advantage by Jay B. Barney [textbook]
• Amazon Looks to Diversification in Drive for Profit by Stephen Phillips [http://www.computerweekly.com/feature/Amazon-looks-to-diversification-in-drive-for-profit]
• Amazon 05 - Diversification Strategy by Pere Joan [http://www.slideshare.net/PereJoan1/amazon-05-diversification-strategy]

Amazon's Backward Vertical Integration Strategy

Every company has a value chain (the set of discrete activities that must be accomplished to design, build, sell, and distribute a product or service) and each activity listed in the value chain must be accomplished in order for the product to be sold to customers. Firms can decide which of those activities they engage in, and which other firms can engage in. The greater the number, the more vertically integrated the firm is.

Vertical integration occurs when a customer either buys or starts a company and integrates it into their current business. Note that this number doesn't have to remain constant over time; companies can engage in forward vertical integration (getting closer to the end customer) or backward vertical integration (getting farther from the end customer).

One of Amazon's biggest value chain moments was when they decided to revolutionize the digital books business by exclusively publishing books aimed at its Kindle platform. In this move, Amazon successfully removed the publishing houses, or "middle men," from the process. By owning this piece of the value chain, Amazon would be handling every step of a book's life cycle after it's been written (editing, producing, marketing, selling, and even providing the device needed to read it.), and thus redefining how customers interact with and relate to e-books.

Using this backward vertical integration as a source of competitive advantage can be hard, but Amazon (even through backlashes from Apple and other book retailers) can tell the value added as a percent of sales (which is the best way to tell the success in any act of vertical integration). By creating a user experience that completely changed the way users interact with and relate to e-books, Amazon has the chance to own the market and drive the future of e-books commerce.

Will this move guarantee Amazon a number one position in the seller of e-books? They currently have a seventy percent market share, but there are still competitors, like Barnes & Noble's Nook that is undergoing vertical integration of their own. This leads to the bigger question: How else will the internet affect other companies' value chains?

Sources

• Gaining and Sustaining Competitive Advantage by Jay B. Barney [textbook]
• Moving Into the 3rd Dimension of Vertical Integration by Nurun Team [http://www.nurun.com/en/our-thinking/future-of-retail/moving-into-the-3rd-dimension-of-vertical-integration/]
• Amazon, Apple, and the Perils of Vertical Integration by Tim Worstall [http://www.forbes.com/sites/timworstall/2012/04/23/amazon-apple-and-the-perils-of-vertical-integration/]
• Amazon Your Industry: Extracting Value from the Value Chain by Booz and Company [http://www.strategy-business.com/article/10479?gko=7b809]

Booksellers Seek Tacit Collusion to Fight Against Amazon

Amazon has a competitive strategy when it comes to their e-books: First, offer the cheapest prices. Second, become the monopoly. 

Done and done. 

In 2012, Amazon offered top-notch, brand new e-books for an astoundingly low price of $9.99, sometimes even coming at a loss to themselves (this was lower than what they were even paying the publishers for the books). Whether their plan was simply predatory pricing or gaining a competitive advantage in order to raise prices in the future, it doesn't matter. Other booksellers noticed this move. Since they didn't have pockets as deep as Amazon, they were worried.

Seeing this threat of rivalry, Apple and five other major book sellers realized that with a price that low, they would be less likely to earn economic profits. So, they successfully implemented a collusive strategy in order to exploit an opportunity to neutralize the threat: coordinate their production and pricing strategies indirectly by observing the output and pricing decisions of other firms. (Otherwise known as tactic collusion.) 

To break Amazon's monopoly, these publishers raised prices. To do this, Apple conspired with the publishers so they would all move from the $9.99 “wholesale” model to a tiered “agency” model that gave publishers the power to dictate retail prices, after which they coordinated a price hike. This would ultimately raise book prices by up to 40%, thus challenging Amazon and forcing them to raise its prices or lose access to all those books if they did not accept the new arrangement. 

Funny enough, this resulted in the Department of Justice (DOJ) filing an antitrust lawsuit against Apple and the other publishers, the penalties of which are in effect until 2018. At that time, we will get to see if the agency model can prevail, even if it started from less-than-wholesome foundations.

More importantly, I stated that this was a tacit collusion strategy. Collusion of any sort exists when firms in an industry agree to coordinate their strategic choices to reduce competition in an industry. However, with Apple being at the center of the conversations with the other publishers, it sounds like it could potentially be explicit collusion, especially now that the law is involved (explicit collusion is typically illegal). Two other reasons this could be explicit collusion:

1. It's explicit when firms negotiate production output and pricing agreements directly in order to reduce competition.
2. The best way a firm can learn what its rivals' intentions are is to communicate directly with each other about their current price and output decisions and their future price and output decisions. Then they can jointly maximize profits.

According to the evidence, Apple could have talked to each publisher separately and this could be the result of “parallel” actions by competitors facing the same market pressures. The fact remains that there was coordination and intent to co-operate, and they are a great example of a business-level cooperative strategy -- we don't have $9.99 Amazon e-books anymore, do we?

Sources: 

• Gaining and Sustaining Competitive Advantage by Jay B. Barney [textbook]
• Litigation & Trial by Max Kennerly [http://www.litigationandtrial.com/2012/04/articles/business-lawsuits/apple-ebooks-antitrust/]
• Pick your Monopoly: Apple or Amazon? by Steven Pearlstein [https://www.washingtonpost.com/pick-your-monopoly-apple-or-amazon/2012/03/05/gIQA0kBB4R_story.html]

Amazon: Stubborn and Flexible

No matter how big a company is, there is the chance for risk and uncertainty while strategic decisions are being made, and it can be argued that the way a company reacts can make or break them. Risk arises when there is a possibility for multipole outcomes, which results in uncertainty. During this time, decisions that enhance flexibility are more important than ever.

Under conditions of high uncertainty, flexibility is crucial for survival. Luckily, Amazon is not hurting in this area. Jeff Bezos, CEO of Amazon, has publicly stated that "We are stubborn on vision. We are flexible on the details."

In reality, a company has six 'real options,' or the right to make an irreversible investment on or before the date an opportunity ceases to be available. This is one way that businesses can implement flexibility. It also helps value a company that can provide some type of future flexibility in a way that traditional financial analytics can't provide (like NPV or IRR).

1. Defer
2. Grow
3. Contract
4. Shut down and restart
5. Abandon
6. Expand

For example, when Amazon only sold books, their real options were as follows:

1. Grow
1. New business options (zShops, AmazonAuctions)
2. Acquisitions (including Drugstore.com, Ashford.com, Della.com, Pets.com, Greenlight.com ....and 23 more)
3. New customers (began selling music, videos and DVDs in 1998; software, toys, electronic products and home products in 1999; kitchenware and gardening products in 2000)
2. Expand
1. In 1999, they expanded outside the United States and entered the European market

In fact, over 90% of Amazon's innovative ideas is incremental and, as a result, less risky (see the year gaps). We can tell by their history of real options that giving up is not in their cards.

In Amazon's case, they hate risk. Bezos says, “Good entrepreneurs don’t like risk; they seek to reduce risk…Starting a company is already risky, and then you systematically eliminate risk step by step in those early days….you kind of need to systematically identify risk and then as the company gets bigger and more robust, you can start taking risks again but in those early days a lot of it is about ‘okay I have a good idea, how do we reduce risk?’”

Stay stubborn and flexible, Amazon.

Sources:

• 12 Business Lessons You Can Learn from Amazon Founder and CEO Jeff Bezos by Zach Bulygo [https://blog.kissmetrics.com/lessons-from-jeff-bezos/]
• Amazon’s Innovation Philosophy Braden Kelley [http://www.innovationexcellence.com/blog/2012/07/30/amazons-innovation-philosophy/#sthash.KBbCt75C.dpuf]
• Using real options in strategic decision making by Chris Walters and Tim Giles http://mba.tuck.dartmouth.edu/paradigm/spring2000/articles/walters-decision_making.html]
• Valuing real options: frequently made errors by Pablo Fernández [http://www.ucema.edu.ar/u/jd/Inversiones/Articulos/Paper_Valuing_Real_Options_Frequent_errors.pdf]

What is Amazon's Product Differentiator?

There are (well, used to be) two types of organization attributes: Cost leaders and benefit leaders. To be successful, economist Michael Porter argues that a business must choose one; to try to do both means poor performance. However, recent thoughts are leaning away from that thought. Studying the relationship between product differentiation, market share, and low costs is doable, and some firms have learned to manage the best of both worlds.

We have already established that Amazon is most definitely a cost leader (see previous blog post). But, let's move the conversation further -- Has Amazon simultaneously led a low-cost strategy and a product differentiation strategy? In one way, you can see that one leads to the other: Product differentiation can lead to high market share and low costs.

Let's look at what products Amazon is known for: The Kinde and Other (let's use this bucket to include the sellers' products, which make up a majority of Amazon's sales).

One, the Kindle. Amazon introduced the Kindle to compete with Apple's iPad, and even Apple's e-book prices. Amazon is already at a disadvantage here, adding a new product to an already-existing market. While the iPad was generally for web-browsing, the Kindle would be more beneficial for book-readers. However, the market needed more web-browsing than book-reading, making the iPad remain a higher-seller. Additionally, true to the low-cost leader it is, Amazon sold the Kindle Fire for $199 even though it costs $202 to make, the Kindle for $79... And sold e-books at $9.99, making another monetary loss. (This seems silly, but when you're big, you can do things like push out the paper-book market.)

Two, others' products. Amazon has evolved on e-commerce and selling others' goods at a low cost. In fact, Amazon sells products that span over 25 categories There is nothing differentiated about these products. For fun, check out a detailed infographic here.

The answer is no; Amazon is simply a cost leader and does not have a sustained advantage via a differentiated product. Amazon tried this via the Kindle, but they never found a delicate balance between the two strategies. Which is fine - there is an art to the implementation, and I have no doubt that Amazon could master it.. If they wanted and needed to. With such a strong cost leadership, do they really need to enter into the differentiated product market? Even with lower margins, stockholders still appreciate the market share Amazon has, thanks to its low-cost strategy.

Sources:

• Gaining and Sustaining Competitive Advantage by Jay B. Barney [textbook]
• The Two Business Strategies: Cost Leadership and Benefit Leadership (And Where Michael Porter Missed The Mark) by Jake Nielson [http://www.theinnovativemanager.com/the-two-business-strategies-cost-leadership-and-benefit-leadership-and-where-michael-porter-missed-the-mark/]
• Exactly How Many Products Does Amazon Sell? by 360pi [http://360pi.com/many-products-amazon-really-sell/]
• Benefit Advantage and Product Differentiation (iPad vs. Kindle) by Mattman [http://mbanotebook.blogspot.com/2010/04/benefit-advantage-and-product.html]
• $9.99 Ebook Price To Cost Apple $252 Million by Peter Cohan [http://www.forbes.com/sites/petercohan/2012/04/12/9-99-e-book-price-to-cost-apple-252-million/2/]

Amazon Has Been the Cost Leader and Will Continue to Be

Amazon is perhaps the leader in cost leadership (meaning, lowering economic costs below those of competitors). And this isn't by accident - CEO Jeff Bezos has made cost leadership Amazon's strategy since day one. "There are two kinds of companies: Those that work to try to charge more and those that work to charge less. We will be the second."

Recently, Amazon rolled out a competitive strategy for consumer packaged goods, hoping to bring products to consumer's home more cost-effectively than anyone else can. Because of their strategic position, Amazon has the luxury of negotiating directly with their suppliers for space inside the suppliers' warehouses. What does this have to do with cost? Actually, this is beneficial for Amazon in many ways:

• Wider SKU assortment with immediate availability
• Lower inventory costs overall
• Reduce warehousing and inventory for bulky items
• Just in time supply
• Reducing the overhead of building new warehousing space
• Prime locations to service consumers directly
• Price competitive advantage & shipping vs. traditional retailers

Thanks to economies of scale and the sheer volume of production that Amazon sees daily, they can keep this cost leadership up. First, their they can use specialized manufacturing tools, like this new strategy for consumer packaged goods. Second, because their production is higher, they can build larger manufacturing operations (or, more specifically, create space in suppliers' warehouses). This lower per-unit-cost leads to lower average costs of production. Third, Amazon's costs lower because employees can specialize in a narrow task, rather than having to play multiple roles in the manufacturing process. Lastly, overhead costs are spread between more units.

Amazon doesn't suffer from diseconomies of sale, or the kinds of physical limitations that smaller corporations face in manufacturing processes.

To keep up with Amazon, traditional brick-and-mortar stores like Wal-Mart and Target must provide as much of a differentiated customer experience as Amazon provides in customer service and cutting costs. Amazon has such a learning curve when is comes to manufacturing processes that they are almost guaranteeed to have the lowests costs in the industry. Instead, other businesses need to focus on being a benefit leader, because there isn't any getting close to Amazon's success. This is their playing field; their advantages are rare, they are ever-evolving, and they cannot be copied.

Sources:

• Gaining and Sustaining Competitive Advantage by Jay B. Barney [textbook]
• The Two Business Strategies: Cost Leadership and Benefit Leadership (And Where Michael Porter Missed The Mark) by Jake Nielson [http://www.theinnovativemanager.com/the-two-business-strategies-cost-leadership-and-benefit-leadership-and-where-michael-porter-missed-the-mark/]
• Why Amazon's "Under Tent" Strategy Poses Serious Threats to Retailers by IMS [http://www.imsresultscount.com/resultscount/2013/10/amazon-forges-another-competitive-advantage-over-retailers.html]

Is Jeff Bezos Amazon's Greatest Strength?

As the founder and CEO of Amazon, Jeff Bezos has played a large role in the growth of not only one of the largest companies in the nation, but in e-commerce itself. But is this success by chance, or a direct result of a 20-year stint of great leadership?

The person who plays the role of CEO, or any other general manager, is an important possible strength for an organization. Bezos is known to be a happy-go-lucky risk-taker with an attention to detail and a tendency to micromanage. He also isn't afraid to experiment, even when margins are low; his portfolio of investments ranges from airspace travel to Airbnb. It seems to work for him; Bezos has been recognized as one of America's best leaders, even to the level of the second-best CEO in the world (behind Steve Jobs). And with Jobs's recent passing, Bezos could be well on the way to being the role model for all other general managers in the nation. Bezos was also named as a Fortune Businessperson of the Year. These awards don't come lightly; no matter how much Bezos experiments, keeping the Amazon experience excellent for the customer remains at the forefront. There's a certain respect for a leader who lives out the company's mission in every decision.

The person who plays the role of CEO can also be a weakness. This makes it difficult to prescribe exactly what makes strong leader; what works for some may not work for others. For example, being hands-off can be touted by some as the key to success, while others can tout being hands-on the reason for greatness. In Bezos's case, the exact qualities that make him a strength to Amazon make him a weakness, in some eyes. He was named World's Worst Boss for alleged workplace conditions (long hurs on feet, harassment, high turnover).

Ultimately, Amazon wouldn't be here without Bezos, and Amazon wouldn't still be here and running strong without Bezos. Whatever the nay-sayers state as fact can't ignore that record. "His moves are driven by clear thinking and a cohesive vision, even if it takes a while for rivals to figure out Amazon’s motives — at which point it may be too late."

Jeff Bezos is an important source of comeptitive advantage for Amazon. There - I set the record straight.

Sources:

• Gaining and Sustaining Competitive Advantage by Jay B. Barney [textbook]
• Jeff Bezos by Wikipedia [https://en.wikipedia.org/wiki/Jeff_Bezos]hgiju]
• Jeffrey P. Bezos by Julia Ramey [https://web.archive.org/web/20090204204126/http://www.portfolio.com/resources/executive-profiles/Jeffrey-P-Bezos-1984]
• Amazon's Jeff Bezos: The Ultimate Disrupter by Adam Lashinsky [http://fortune.com/2012/11/16/amazons-jeff-bezos-the-ultimate-disrupter/]

Remember When Amazon Led the Emerging Online Bookstore Industry?

Amazon created an industry around technological innovation: the idea of the online bookstore. Customers' needs were developing, and emerging towards a new .The result was superior performance for a time... In fact, from 1995 until who knows.

That was Amazon's advatage: They were first movers in the development of this industry; they created the strategic and technological decisions early enough to where firms either imitated them (Barnes & Noble) or joined them (Borders).

1. Technological leadership

Amazon framed customers' expectations about what an online book retailer loos like, the user experience, the organizing of genres, the pricing, customer ratings and reviews, and more. Building on their success of the online bookstore, Amazon expanded their inventory to include music, electronics, apparel, toys, and housewares, all the while continuously improving their users' experience while keeping it familiar enough to not lose their customers.

2. Preemtion of strategically valuable assets

In emerging industries, many of the rules and standard operating procedures for competing and suceeding are yet to be established, so they can sometimes create the rules that end up benefiting them. Amazon formed relationships with publishers and authors far before others were able to reach out to them. This bargaining power even leads to Amazon being able to control price. Additionally, strategically-placed distribution centers and fulfillment methods are incomparable to what other companies could replicate. 

3. Creation of customer-switching costs

Amazon created cutomer expectations around online boostore and, ultimately, e-commerce, and customers are happy with what Amazon has shaped to be. Customers have an account, they do one-click shopping, and they have no need to go elsewhere. Why do that, when you have everything you need at your fingertips? The risk of being disappointed is too great.

Most first-movers see the advantage of maintaining 7% of the market; Amazon sees much more than that, being one of the most recognized e-commerce retailers on the Internet. Will there every be a second-mover that eclipses Amazon's success? It's doubtful, as no other online company has been nearly as successful. Aso, the second-mover pays approximately 65% more than the first-mover just to be on top. If Amazon is eclipsed, it will be by a very big, technologically-savvy, and luctarive business.

Sources:

• Gaining and Sustaining Competitive Advantage by Jay B. Barney [textbook]
• First-Mover Advantage by Deborah R. Ettington [http://www.referenceforbusiness.com/management/Ex-Gov/First-Mover-Advantage.html]
• First Mover or Fast Follower? by Scott Anthony [https://hbr.org/2012/06/first-mover-or-fast-follower]
• First-Mover Advantages by Stay Young [https://calvinblogger.wordpress.com/2013/03/19/first-mover-advantages/]

Application of Five Forces Model to Analysis of Threats in Amazon in the online-book selling industry

We all know about Amazon, right? How about their evironmental threats?

Porter's Five Forces Model is the king of recognizing a company's environmental threats, or those forces outside their control that could either improve or take down their company. By looking at the five forces, a company can guage their attractiveness/competitiveness and, based on the analysis (which is more qualitative than a quantitative Excel sheet), adjust their strategy accordingly.

Amazon has it all, right? Let's see.

1. The threat of entry

Technically, it should be easy for someone to compete with Amazon: it's cheap to create an online platform and to minimize costs to a competitive level since there are no brick-and-mortar stores to erect. In fact, any current brick-and-mortar store could carry their customer base over to a similar online model, much like Barnes & Noble and Borders did in the online book-ordering segment, which Amazon created in the mid-90s.

But Amazon has natural costs of entry that would make any new entrant an actual threat. As easy as it is to enter the online market, it will be almost impossible to reach Amazon's level.

• Economies of scale: Amazon has 10,000+ vendors and has 75% repeat purchasers. They have built an impressive network of warehouses that were originally for book selling, but have grown to match their increasing product lines. 
• Product differentiation: Amazon has no unique goods, meaning they have formed relationships with vendors in almost every sector, including books and other online entertainment.
• Cost advantages: Amazon's cost structure is lower than any of its competitors, and is considered to be one of its secrets. They spend three more times than the top five competitors put together on R&D, resulting in breakthrough efficiency and effectiveness models, including search improvements and removing 88% of the reasons users stop an online shopping search.

Ultimately, the threat of new entrants could be considered low.

2. The threat of rivalry

Amazon has a multitude of rivals spanning a multitude of products and services, either directly or indirectly, and even more so as the internet increasingly becomes a main vessel for buyers. And as companies see the profit margin for going online, it’s a guarantee that more will come. However, Amazon has the advantage of 75% return buyer rate, making the switching cost high for a lot of buyers who are accustomed to Amazon’s layout, customer service (which remains high), and benefits (Amazon Prime).

Ultimately, the threat of rivalry could be considered high.

3. The threat of substitutes

Amazon offers such a wide range of products and services, they have a potential substitute or two at least every variation of that product or service in both the internet and retailing industries. (The benefit being that on Amazon, it’s all in one spot. Hello, convenience.) Amazon’s patented 1-click ordering offers a competitive advantage, but otherwise, any rival could technically substitute a product or service that Amazon offers.

Ultimately, the threat of substitutes could be considered high.

4. The threat of powerful suppliers

Amazon is a global, well-known company utilizing suppliers of all walks. Amazon has the benefit in that they buy in bulk (attractive to a supplier) and that their products aren’t unique, meaning of a supplier doesn’t work out, there will be another one who can provide what Amazon needs.

Ultimately, the threat of powerful suppliers could be considered low.

5. The threat of powerful buyers

In the online market, buyers can go to any online store that also has low overhead and competitive prices. Amazon works hard to maintain their customer base, but it is a dangerous situation, as they could easily leave if something goes wrong on Amazon’s side.

Ultimately, the threat of powerful buyers could be considered high.

Overall, Amazon has more challenges that you might think. However, if they continue to maintain their competitive advantage, just like they have sine 1995, they’ll still be top.

Sources: 

• Gaining and Sustaining Competitive Advantage by Jay B. Barney [textbook]
• Strategy Framworks: Threat of New Entrants - Porter's Five Forces Model by Martin [http://www.entrepreneurial-insights.com/threat-of-new-entrants-porters-five-forces-model/]
• How to Use Porter's Five Forces Model by Annmarie Hanlon [http://www.smartinsights.com/marketing-planning/marketing-models/porters-five-forces/]
• Amazon’s Cost Advantage in a Cascade Chart by David Goldstein [http://www.mekkographics.com/amazons-cost-advantage-in-a-cascade-chart/]
• Amazon.com: An E-commerce Retailer by Sarah Bouchard [http://sarahbouchard.com/works/Papers%20etc/Amazon_PaperFINAL.htm]

Has Amazon Contradicted Economic Theory?

Traditional economic theory says that a sustained competitive advantage - that is, one that is so unique, it dominates its niche - is unrealistic. Eventually, competitors will be able to mimic strategy and replicate flagship products, so that economic party will win in the long-run.

Has Amazon broken that theory?

Amazon's unique niche is their online market: Similar audiences to other large retailers, but with competitive prices, quick and low-cost shipping (thanks to warehouses spanning the country), an accessible online market, and lower margins than a brick-and-mortar retailer... What's not to love about that?

Since ... But where does their future lie? Will economic theory play out, and Amazon will give way, or eat least equate to, another retail giant? Like WalMart?

For Amazon to maintain this competitive advantage, they need to make sure four pieces of their business remain:

1. Informally complex.

Amazon began as an online book retailer, promoting their Kindle and related products. In the following 21 years, they have grown to an enormous variety of products that users naturally follow. Their offerings are complex (everything from cloud storage to buying Nine West shoes), but the process is so informal, an average user can use it, yet still find it intriguing. For example, all it takes is an email address and password, then a credit card in order to access everything. One more simple decision is upgrading to Prime for $99/year in order to access these same offerings, but in a deeper way.

2. Require customers to know a great deal in order to use their product.

While the initial introduction of a user to the Amazon marketplace is simple (create log in information), it is important that users understand the basic values of the price of a product on Amazon versus a brick-and-mortar store, the economic value/ease of using Amazon versus other music/book/entertainment provider, and the benefit of publishing work via Amazon versus another retailer. The use of the product is simple; however, one could research for days the amount of products Amazon offers.

3. Require a great deal of research and development.

Amazon has grown by improving their warehouse spaces and location worldwide (from $477 million to $6.41 billion in a decade), their technology (increase of $208 million to $4.56 billion in the past three years), and by acquiring key companies (such as Zappos.com with their robotic warehouse technology).

Nothing says research and development more than a number one company strategically putting millions of dollars into these three key elements, right?

4. Have significant economies of scale.

Simply put, Amazon is able to offer products cheaper and faster. Isn't that the goal of every store? But has every store achieved it? For the 10th straight year Amazon.com is the biggest Top 500 retailer. As long as Amazon is around and continues to grow and scale/open more distribution centers, they will continue to be a force to be reckoned with.

Luckily, Amazon is master at all of the above. And given every leg-up Amazon has on other retailers, with more coming (drones?), it's unlikely we will see another firm try to compete with Amazon. They have too big of a head start and too much invested in their strategy to welcome any competition.

Amazon: 1994-?

Sources:

• Gaining and Sustaining Competitive Advantage by Jay B. Barney [textbook]
• Amazon's Sustainable Competitive Advantage by Daniel B. Kline [http://www.fool.com/investing/general/2015/05/18/amazons-sustainable-competitive-advantage.aspx?source=eptmsmlnk0000001]
• The Source of Amazon's Competitive Advantage by Dr. Tony Grundy [http://www.accaglobal.com/za/en/discover/cpd-articles/business-management/amazon-flow.html]
• Amaon Keeps Spending - and Growing by Mark Brohan [https://www.internetretailer.com/2013/04/30/amazon-keeps-spendingand-growing]