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]