In December 2008, Forbes named Amazon.com as the top retailer in the United States, besting the likes of Wal-Mart, Target and Costco
Amazon’s success is based on a number of different factors, including timing, technological innovation, and its ability to continuously expand its product line without losing sight of its core vision.
Amazon.com was launched in 1995 as an online book store. The company was a pioneer of online retailing and over the years undertook a pair of strategies key to its long-term growth. The first was that they rapidly expanded their product lines. It first moved into music, but has since expanded to include a wide range of household products. Amazon has remained exclusively an online retailer, with no bricks and mortar presence. They operate a number of warehouses from which they ship their products. Some products are offered by retail partners as well.
Throughout most of its existence, Amazon.com has grown rapidly. In the past five years, revenues have improved an average of 35% annually. Over that span, Amazon has improved operating profit an average of 33% per year. There have been, however, some fluctuations in the company’s net profit figures. Since Amazon turned its first profit early in this decade, it has remained consistently profitable. The company has a strong balance sheet. They are liquid and have steadily reduced their long-term debt over the past five years, bringing it down from $1.85 billion to $409 million. The company had negative equity five years ago and today Amazon’s equity is worth $2.67 billion. The economic slowdown has had little to no impact on Amazon’s growth. In Q4 2008 the company recorded a sales increase of 18% over the previous year’s Q4 figures
. In short, Amazon has grown rapidly and consistently improved its financial strength.
Most recently, the company has been focused on finding ways to continue improving sales and revenues through the economic downturn. They have, however, branched out into new product lines. The most important of these from the company’s perspective is the Kindle 2, a device that allows Amazon customers to read books electronically. The book is downloaded onto the device, which is portable. This represents an attempt on the part of Amazon to have an impact on the ways in which consumers read and purchase books, adapting the .mp3 delivery of music to a book context
The strong growth in Amazon’s business can be attributed to a couple of different factors. One is that consumer adoption of Internet shopping has increased steadily over the past decade. Amazon was able to get first-mover advantages by setting up shop in the mid-90s. This advantage helped it weather the dot-com burst in 2000, setting it up for a strong rebound. With one of the strongest brands on the Internet, Amazon has a sustainable competitive advantage that allows it to draw both new and repeat customers. New Internet shoppers are likely to make Amazon a first choice, with its brand and reputation, and Amazon has done an exceptional job of retaining customers.
That customer retention has been one of the keys to Amazon’s strong growth. Many of the company’s initiatives were groundbreaking in the e-commerce field. The use of consumer reviews was relatively novel when introduced, but the company’s real strength is in technological development. Features such as the “customers who bought X also bought Y,” recommendations tailored to each individual shopper and other targeted initiatives have helped drive sales at Amazon. Much of this technology is proprietary but has been emulated by other firms in the industry.
The company has grown both domestically and internationally over the past few years. Domestic growth rates in terms of sales have ranged between 25% and 38%; international growth rates between 28% and 39%. As a result, the international market accounts for 47% of Amazon sales today
. In this way, we can see Amazon behave like a truly global retailer. With minimal bricks and mortar investment, they are able to move overseas in a way most retailers cannot. It is unusually in retailing for an American company to have such strength overseas. This is a function of Amazon’s strong management — they are able to manager strong growth internationally alongside strong growth domestically. Amazon is almost entirely unique in this respect. Wal-Mart has some international presence but even some giant retailers such as Target and Walgreen’s have absolutely no international presence, not even in Canada. Amazon’s ability to design and execute a truly global retailing model is one of its greatest strengths.
These achievements illustrate Amazon’s strength, which derives from exception performance in its two main activities. The company is both a technology company and a merchandiser. It would be easy to see online retailing as little more than conventional retailing adapted to a different format. A company can sell online with fairly basic technology. Amazon has taken a different approach to technology, deciding that technological leadership and innovation would be a key component to its success. This requires a strong commitment from management, because constant evolution of technologies and business practices can be risky. The Kindle 2, while not a huge component of Amazon’s success, illustrates how the company has attained excellence in innovation. Amazon, having no experience in hardware development, was willing to commit millions of dollars and hire a whole new department to execute on an idea they felt was a winner. This dedication to innovation has combined with a customer focus to produce industry-leading technological initiatives.
The customer focus is an element of Amazon’s other core strength — merchandising. No retailing firm can succeed without strong merchandising skills. Leading companies such as Wal-Mart and Costco were built by CEOs with exceptional merchandising skills. The art — getting the right product in front of the customer at the right time — can lead to dramatically increased sales. Amazon has developed exceptional skill in online merchandising. The technology that they use to track customers’ movements and then recommend products based on those movements is one of the biggest reasons for their success.
Another innovation that has helped drive Amazon is its associates program. This allows other websites to drive traffic to Amazon for a commission. This tactic is specific to the online retailing model. It leverages Amazon’s strong brand equity and broad product line. The result is that Amazon has been able to drive business to its sight at a relatively low cost — a big improvement over the expensive marketing campaigns undertaken by many bricks and mortar retailers.
All of the competencies outlined thus far are examples of achievement on an individual or departmental level, but they also attest to the excellence of Amazon’s management in one other respect — the management team has been able to seamlessly integrate each of those core competencies together. Amazon’s success derives from its ability to grow domestically and internationally, a feat achieved by few American retailers. The blending of technology and merchandising is also difficult, yet Amazon’s management has been able to achieve it smoothly. Compounding the difficulty is Amazon’s ability to maintain a strong customer focus. The company prides itself on its customer focus, and allows this focus to work its way into strategy effectively. This could be difficult, considering that Amazon’s other initiatives are largely internally-driven. Adding focus on such a strong external influence could easily result in goal confusion, yet Amazon’s operations remain surprisingly simple. The company has never veered far from its original model, but has instead focused on improving its platform and adapting it to a wider range of products and markets. This is what has driven success at Amazon and made it one of America’s best managed companies.
The attractiveness of working at Amazon is not so much that the firm is successful. There are many successful firms, companies with substantial opportunities for growth and improvement. The attraction of Amazon lies in the way that the company has achieved its growth. They have taken a fairly simple concept and it the span of 14 years gone from nothing to one of the largest, most successful retailers in the world. Amazon has done this by keeping their core business simple, but building upon this basic model. The result is a business that is simple, yet has achieved a level of complexity seldom seen in retailing. The way that Amazon has been able to manage multiple, sometimes conflicting core competencies simultaneously while never losing focus of the fact that they must meet the needs of the customer is admirable. The way that Amazon has been able to focus on being both a technological leader and an expert merchandiser; a domestic retailing giant and an international retailing giant is admirable.
There is much to learn from a company that can go in as many different directions as Amazon has and yet seem as though it has always only gone in one direction. The level of coordination that requires and the level of integration at all levels of management would provide me with substantial learning opportunities. Some companies succeed by developing competencies in one area. I admire Amazon’s ability to simultaneously develop competencies in a wide range of areas.
Forbes Magazine. Retrieved April 22, 2009 from http://www.forbes.com/lists/2009/88/bigcompanies08_The-400-Best-Big-Companies-Retailing_7Company.html
All financials derived from MSN Moneycentral. Retrieved April 22, 2009 from http://moneycentral.msn.com/investor/invsub/results/statemnt.aspx?Symbol=AMZN&lstStatement=Income&stmtView=Qtr
Tombolini, Antonio (2007). The Amazon Kindle and the state of the e-Book Marketplace. Master New Media. Retrieved April 22, 2009 from http://www.masternewmedia.org/news/2007/11/22/the_amazon_kindle_and_the.htm
Amazon.com 2008 Annual Report
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