Analysis Of The Strategy Being Pursued By Amazon To Become Valuable
Amazon creates new markets and disrupts various industries at an incredible pace. Almost all available business opportunities seem to be in its radar. In order to understand how it is creating value for itself and its stakeholders, it is important to analyse the various value-creating initiatives that it is undertaking (by analysing their business model, stakeholder announcements, their product offerings and patent filings). The company is aggressively investing in new technologies and gradually increasing its innovation index (II) with new products, services and technology. More importantly, it’s obsessed with being ‘customer centric’ – a core company value which is the primary pillar of its strength, success and value creation capability.
Amazon is creating value and significantly increasing stakeholder returns in the below mentioned ways:
- Vertical and Horizontal Integration: The traditional growth and success strategy
- Value Creation: Through new innovative products, categories and platform
- Value Migration: Through gradual movement into adjacent industries and categories
- Value Delivery Systems: Through alignment behind its core value proposition.
Vertical and Horizontal Integration
In the last 2 decades, Amazon has monetized value via horizontal and vertical integration. It has leveraged its core strength in logistics and shipping (supply chain) to integrate backwards and enter new markets. It has also acquired and partnered with various companies to develop new offerings, new product lines and expand into new categories with new disruptive business models and technologies.
By leveraging its expertise in ecommerce system, it has developed Amazon Web Services (AWS) cloud offering as the key integrating factor for their various business models, thus propelling itself to one of the largest IT providers, globally. Further, it has tapped into the rapidly growing IoT areas (Amazon dash buttons). Amazon have integrated vertically all the way back through their supply chain in order to optimize logistics and reduce shipping costs which has led them to be highly competitive in distribution, logistics and multimodal transportation means (Fulfilment by Amazon – FBA, Airborne Fulfilment Center – AFC, Private labels, filed patents for on-demand custom manufactured clothing machines, Hands-free camera and style assistant).
The strategy of integrating vertically and horizontally has enabled it to monetize and manage every layer of the customer journey from identification of potential customers, to “one-click” ordering, payment, manufacturing, and delivery at the purchaser’s doorstep. Through mastery of the integration process, Amazon is continuing to invest in data science, machine learning and artificial intelligence so as to further optimize its offerings.
Thus, it has been successful in squeezing higher profits out of its value chain through its unique understanding of customer needs and buying behaviors/patterns to provide customized offerings which are delivered through its own supply chain (end-to-end), thus, increasing its revenue and generate economies of scale.
- Customer-centricity – focus towards owning the customer relationship chain.
- Creating platforms - to leverage and monetize ecosystem partners (Amazon marketplaces).
- Develop infrastructure capabilities to support market offerings through new services (AWS and IoT).
- Self-service platforms which can scale (Marketplaces, AWS and IoT).
- Exploit Big and small data to identify new opportunities (Private label brands).
- Continuously optimize the entire supply- value chain in order to achieve economies of scale.
Value Creation
Value Creation refers to the creation of something entirely new – a radically different product, service and new category. The two most significant examples of its value creation process are: Alexa platform/Echo smart speakers and Amazon Prime.
Alexa (and language voice interfaces) will help power ubiquitous connectivity and computing wherever you are, on whatever device you are interacting with and will help accelerate the adoption of the Internet of Things (IoT). This capability coupled with easy access to skills, applications, and content will provide the pathway for greater ordering (products and supplies) from Amazon.
Through the Alexa-powered Echo smart speakers, it created an entirely new value offering and have expanded into a completely new product line with varying functionality and price points (“Connected Home”). Further, the process of extending the offerings horizontally to businesses and offices is on. Further, the company is engaged in developing a large ecosystem of partners that are building apps, skills and new licensed hardware devices around Alexa, thus, providing a path to monetize the new offerings on the Alexa platform.
Amazon Prime has been able to continuously enhance Amazon’s offering through the creation of an entirely new value for customers, reinforce brand loyalty and establish itself as a key revenue engine. Further, the lock-in period attached to Amazon Prime helps in driving higher reorder rates and enhances brand loyalty.
Value Migration
Amazon has leveraged its expertise, systems, technology and other core elements to get into adjacent markets. Examples of the same are Amazon Web Services’ (AWS) in cloud solutions and Prime’s Music and video offerings in entertainment solutions.
Amazon migrated to the cloud computing sector by leveraging their expertise developed around large, highly scalable, distributed computing systems and communications infrastructure. Their value migration strategy makes Amazon Web Services (AWS) the largest Cloud vendor globally.
AWS is a perfect example of Amazon using the Value Migration path to enter into an adjacent space and an entirely new market. The same is fuelled by the four guiding principles which is its key growth strategy:
- Extreme focus in providing unparallel customer value
- Focus on operational excellence and improvement of efficiencies
- Risk taking capabilities through the invention of new offerings
- Long-term achievement of objectives.
With the initial offering of selling books, then moving into digital books enabled Amazon to migrate into adjacent areas of customer entertainment. It then entered the music streaming services market as the next stage of its migration strategy. It further, expanded into various other entertainment domains through the distribution of digitised entertainment media via their networks (video, films, TV shows). It is now at the point wherein; Amazon Prime is in a position to commission original content.
In order to further its digital pay-per-use entertainment model, Amazon bought Twitch in 2014, a leader in broadcasting games and moving into sports broadcasting exploring new deals with various sports franchises including NBA. It is also extending its reach further to offer an assortment of live TV channels in order to compete with traditional broadcasters (Amazon Channels).
The development of e-commerce systems enabled AWS to be a powerful computing platform and the development of Prime Video and Music streaming on the AWS platform further increased its economies of scale and made it the ideal platform for any streaming content offering by the company The other products in their stable such as Amazon Firesticks (streaming of their content to TVs, Kindle Fire Tablets (low-cost Android tablets to enable viewers to consume music, books, movies, TV) and Alexa (with AI backend) to make all the above offerings easily accessible through voice commands on phones and other devices, enabled Amazon to exploit its strengths in computing and e-commerce to move into the adjacent multibillion-dollar IT and Entertainment markets in a seamless way, thereby furthering its value migration process.
Value Delivery Systems
Amazon excels at the underlying principles of delivering Value and its focus on customer needs and problems (long-term customer lifetime value – LTV creation) and not solely technology, which enables the company to develop offerings which are not based only on traditional growth strategies, technologies, internal issues and/or competitors which is the key mantra for its successful value creation and delivery. The glaring example of the Amazon Value Delivery System is their e-commerce value chain. At the initial stage of the value creation process, Amazon patented its One-Click ordering system as they wanted to make the buying process for customers, as easy, fast, painless and frictionless as possible. The delivery model was further extended to the physical Dash Buttons which enabled customers to push one button to reorder various products and categories. The company further enabled Dash Replenishment Systems (DRS) for automatically restocking consumable supplies. In addition to the development of a seamless, web and mobile application front end, the company successfully developed and implemented a comprehensive back-end system to handle all delivery-related matters, wherein, orders are passed to their e-commerce servers which then provided customized web pages and solutions for individual customers by providing specific recommendations of add-on products in order to cross and up-sell based on past order history. The same is seamlessly integrated and tied into the order processing systems with suppliers and other available marketplaces, connected with automated distribution centers, shipping and logistics systems. At the last stage of the value delivery process, a network of third-party delivery services (FedEx, UPS etc. ) deliver items to the customers door step.
Package tracking and transit status made the delivery process visible to users as possible and provide the sense of reassurance and helps in maintaining the high satisfaction levels. Thus, Amazon manages to control the complete Value Delivery System to the customers doorstep and ensures that the process is efficient, inexpensive, fast, and traceable. Furthermore, the company ensures post-purchase satisfaction by offering hassle free return shipping. They also offer product warranties to provide complete peace of mind over the entire life of the product. In addition, buyers are encouraged to provide purchase reviews which help inform and reassure other buyers on Amazon as they embark upon their individual purchase processes (social proofing). In order to further its Value Delivery System initiatives to even higher levels, the company announced the Amazon Key automated door lock and camera system (as part of their connected home/IoT offering so as to offer greater ‘last mile’ connectivity and remove fears of theft from the minds of consumers). All of the above-mentioned initiatives provide examples of mastering the entire Value Delivery System which ensures that Amazon’s core value proposition is delivered to their customers at every stage of the purchase process and also during the entire life of the product ownership. The attention on customer focus throughout the entire Value Delivery System leads to a better customer experience, enhancing brand loyalty, ensures less churn, greater repeat purchases and higher revenue streams in the future.
A clear and unambiguous value proposition is the key for mastering the Value Delivery System strategy and then align and integrate customer focus, processes, technology around delivering the defined value to the end customer. Amazon ensures that it’s customers are completely satisfied and receives the benefit of the value proposition delivered through its Value Delivery System, which is the key and the mantra for its success.
