Amazon Business Model & Case Study

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Retail is the sale of goods and services to customers and for a long time, this all took place physically from person to person. But in the past 25 years retail has taken on a new face in the form of ECommerce – the largest member in the United State being Amazon. This new form of retail has rapidly grown into a huge market with total sales of $4.2 trillion worldwide [1]. Given that this market has grown so much what caused this change? Why have consumers transitioned to online retailing over physical retailing? We will explore both questions, an analysis of the current market, a SWOT analysis of Amazon and predictions for Amazon in the following sections.

About Amazon's Background

First, we must establish some background. Amazon is responsible for 40.4% of US ECommerce for a total amount of approximately $370 billion in sales [2]. Amazon is beginning to compete with physical retailers such as Walmart that have been a part of retail for many years more than Amazon. With this in mind we are starting to see an interesting turn in the market towards ECommerce over other options. The answer to this lies largely in the nature of retail – the convenience factor. Retailers such as Walmart and Target aren’t just grocery stores or furniture stores, they have many types of products all in one place. Amazon has swooped in and defined themselves as the convenient option. Amazon has slowly become a “digital Walmart” in terms of the offerings, rapidly going from books to any product on the market.

Amazons Business Model Explained

The business models for physical retailers such as Target, Walmart, and Costco are based on Sales Revenue. This means that the majority of the revenue is garnered from selling products and services to customers. Some of these locations such as CostCo do get some revenue from memberships to access their stores, but this is rapidly being phased out. For example, Sam’s Club has recently changed from a membership only store to offering exclusive deals to those members to become more accessible and convenient for customers. Amazon follows the same suit as the physical retailers and garners most of their revenue from the sales of goods and services but through online offerings. Amazon does make money on a subscription-based model because of Amazon Prime and gains some revenue due to transaction costs on their 3^rd-party marketplace. Additionally, Amazon makes 52% of their operating income from Amazon Webservices (AWS) which offers cloud storage and cloud computing services [3].

Seeing that both physical and digital retail rely on the same business models we must examine their methods of sale.

Amazon Innovation Throughout The Years

First, let’s begin with a timeline of Amazon and its innovations:

1. Timeline of development of ideas/tech involved
   1. 1994 – Amazon starts selling books online
   2. 1997 – Amazon goes public, and an additional distribution center opens up
   3. 1998 – Amazon starts selling music and DVDs
   4. 1999 – Amazon patents “1-click” selling, and Amazon starts 3^rd party marketplace
   5. 2002 – Amazon sells clothes
   6. 2003 – AWS launches
   7. 2004 – Amazon enters China
   8. 2005 – Amazon Prime Debuts
   9. 2007 – Kindle
   10. 2008 – Audiobooks
   11. 2009 – Amazon acquires Zappos for selling shoes
   12. 2012 – Amazon revolutionizes its fulfillment centers with Kiva Robotics
   13. 2013 – Amazon delivers on Sundays
   14. 2014 – Amazon owns Twitch
   15. 2015 – Amazon Echo widely available
   16. 2017 – Amazon buys Whole Foods
   17. 2020 – Amazon sales surge during pandemic

Physical Retail Stores Transition To Digital

Next, we should examine what physical retail stores have been doing during this time. There have been no major advancements in the physical retail space directly affecting customer convenience since self-checkout and the barcode in 1974. Aside from those two points we have seen physical retail stores slowly transitioning to a digital format where they can sell their goods online. We see that, in comparison, Amazon has ingrained themselves into our lives through convenience in record time. Retail stores have been responding to Amazon through other avenues than simply convenience. Many locations have been serving people with “experience” rather than just an exchange of goods and services. Good examples of these are places like Costco that have a cafeteria and Trader Joe’s that have an “exotic” appeal to them. Additionally, some places such as Men’s Warehouse offer in store sizing and the ability to try clothes on as an advantage over Amazon. On top of this, we have seen more brands offering an omnichannel delivery method where you can order things online and then go pick them up in stores. Finally, certain brands have begun to make a name for themselves through influencer marketing and online presence. We see popular streamers and Tik Tokers doing sponsored streams and advertising products for certain brands, something that a large corporation like Amazon cannot do easily.

Amazons Start As A Digital Bookstore

As previously stated, Amazon initially took off by selling books online. However, they were not the first eCommerce platform nor the first eCommerce platform to sell books. Boston computer exchange launched in 1982 and sold used computers utilizing Bulletin Board System (BBS) technology. In 1994, Book Stacks Unlimited (now owned by Barnes & Noble) launched as www.books.com [5]. Additionally, at the time Barnes & Noble, Borders, and Crown Books were the big players in the book industry operating only under physical stores.

Amazon marketed themselves as “Earth’s Biggest Bookstore” and they did so for a good reason. The main advantage that Amazon had over Brick and Mortar bookstores was that there were no inventory constraints. Amazon was essentially able to have an unlimited number of books while other stores were constrained to the space in their stores and would have to order new books whenever they were running low or sold out. Amazon took advantage of this strength and had over 1 million books in their catalog when they launched and over 2.5 million books a couple years later. In 1997 they had over 1.5 million customers in 150 countries [6]. Barnes and Noble and Borders created online catalogs shortly after Amazon did, but it was not as successful as Amazon and Amazon was able to take over most of the eCommerce market share for books. Amazon did not initially have a big disruption in the books selling industry, but it did happen over time due to major bookstores' failure to establish an online presence fast enough and as good as Amazon did. Amazon also provided the same books for less money because they were saving on inventory costs and store operating costs. People would be able to walk into bookstores and browse the books in person and then purchase them cheaper on Amazon. In 2011 Borders shut down all their bookstores and Barnes and Noble has been closing stores since 2008 because of the rise of Amazon.

The biggest takeaway from Amazon’s disruption of the book industry is the proof of concept that you are able to make a successful business with only an online presence. It proved that consumers were comfortable switching over to online retailing and did not feel the need to always go to the store.

Strengths, Weaknesses, Opportunities & Threats For Amazon

A SWOT analysis of Amazon can give important insight into how Amazon is performing in today’s current environment and market. The points that I highlight are not all inclusive but are the points that I feel to be some of the more important aspects of Amazon’s SWOT analysis. Firstly, in regards to strengths Amazon benefits from their powerful brand name. When a customer purchases from Amazon, they have an understanding that this product is backed by one of the largest and most customer orientated companies to exist. With this comes confidence in the products that are sold on the Amazon website. Customer Orientation is another area where Amazon excels. Amazon has always had a feeling of customer care from the consumer sides of things. If a product comes broken or just simply not what the customer ordered then Amazon will often just replace the product with very few questions asked. Other companies in this industry have an almost interrogating feel for when you are interacting with them trying to return an item because it cuts into their costs to deal with customers. Innovation is another strength that Amazon possesses and they continue to lean upon when trying to make improvements to how they operate. Amazon is currently looking at creating self-driving truck and doing drone delivery which would allow them to strengthen their logistic systems and provide customers with even faster and reliable deliveries. Amazon also possesses three key businesses and these include Amazon Marketplace, Amazon Web Services and Amazon Prime. Amazon Marketplace is where Amazon allows third party sellers to utilize their site and popularity to sell products on the Amazon website. Amazon then takes a small cut of their profits for themselves and creates a more diversified shopping experience for their customers. Amazon Web Services is a topic we discussed in class but to be put simply is where Amazon rents out computing power and storage to users for a small rental price in comparison to the cost of setting up the computing power and storage required for the user’s task. Finally, Amazon Prime is a subscription-based product that gives users benefits such as faster deliveries, and access to Amazon’s movie and show libraries. [4]

Some would doubt that a company of this size and power would have very many weaknesses but Amazon is just like any other company and every company has their weaknesses. Firstly, Amazon has a fairly imitable business model where they store the products for sale in a large warehouse and then ship them directly to Comsumers. Just about anyone can do this kind of business but to be able to compete with Amazon on this scale and efficiencies would be challenging since Amazon has been in the industry for so long and has learned what works and what does not work. Some of these items that have not worked for Amazon in the past have been the Amazon Fire Phone and the Kindle Fire. The Amazon Fire Phone was Amazon’s take on a smart phone but had what felt were very gimmicky features due to a lack of technology of the times and was limited to being exclusively on AT&T networks. These two negativities of the phone gave way to its flop on the market that Amazon may never live down. With regard to the Kindle Fire most people who were viewing or looking to purchase such a device would already be on a device that could allow the user to read it digitally. This led to a lack of sales and another flop on the Amazon records. Amazon not only has the weaknesses of having an imitable business model or product flops but also has almost no brick-and-mortar presence. This loses the entire market share of people who would rather go into a store and shop or people who enjoy feeling and holding their products before making a purchase. This loss of market share weakens the business as a whole by losing prospective customers and often times leading them to competitors such as Walmart. Finally, Amazon may have grown too large and has lost the ability to check each one of their products that they are selling on their website. This in turn has led to a decrease in customer safety and the assurance of high-quality products. [4]

Opportunities for Amazon are constantly changing due to the company being so innovative but they have three areas of opportunity that I believe will benefit them the most. Firstly, creating more physical stores so they can recapture that sector of the market that they have loss for being completely online. Secondly, expanding their Amazon Basics and Amazon choices selection. Amazon basics are the products that Amazon themselves produce and sell on their site. Amazon choices on the other hand is where Amazon for a given category of items gives their opinion of, they feel like are the best items that they sell. Thirdly, Amazon can keep improving on their self-driving capabilities. With self-driving trucks Amazon can become more immune to worker call offs or labor shortages in the trucking industry. As this pandemic has shown, with a fragile logistics system companies are extremely weak to natural disasters or pandemics that inhibit the transfer of products across the country. [4]

Finally, the threats that Amazon faces come from governments, themselves, and their competitors. Governments do not enjoy when companies grow to the size that Amazon has globally. In order to restrict the power that Amazon possesses across countries, governments create restrictions to hinder growth and power that Amazon would possess if left unchecked. Not only do governments pose a threat to Amazon but some of their competitors are evolving in ways that may steal some of the market share Amazon has been able to possess. Walmart specifically has been developing their ecommerce presence allowing the shipping of their products and creating a business model that mimics how Amazon operates. Ebay has also been a competitor since the very beginning of Amazon and directly steals market share away from the Amazon marketplace business. Finally, sometimes the greatest threat to Amazon is Amazon themselves. With links to exploitive labor in Asia where companies who sell to Amazon or sell on Amazon utilize child labor or make people work in unsafe environments. Amazon has also been getting ridiculed for the long hours and consistent monitorization of American workers working in Amazon warehouses. These cause distrust and people actively trying to avoid supporting a company that allows these types of exploitive labors. [4]

Market Growth & Future Predictions For Amazon

We predict that as the market continues to grow, it will continue to shift to a greater online presence. The COVID-19 Pandemic has emphasized that given the right infrastructure we can accomplish an immense amount of work online. Amazon is already a very influential company in this space so it is hard to imagine they will lose any market share especially considering their surging performance during the pandemic to a $3600 stock price. It is also worth noting that Amazon has had a lot of change in leadership recently. After Jeff Bezos stepped down it created a large ripple effect in leadership across the company and its various departments.

Despite this uncertainty in the market due to the global pandemic and shifts internally with Amazons leadership changes, there are some concrete areas the CEO can focus his efforts to ensure growth and stability for the company. First, Amazon needs to continue to diversify their offerings and enter new markets while holding current volumes steady. They also need to prevent a “brain drain” in their Amazon Web Services space to ensure their offerings don’t plateau and lose effectiveness as more and more firms are moving online and requiring pay-as-you-go services. In addition, they need to continue to evolve their tech-based products and service offerings. Autonomous vehicles and drone delivery are some potential options to continue to develop. Amazon should also continue to bolster their physical locations and satisfy that niche consumer preference of physicality as more and more firms more fully online. Lastly, they should continue to make the purchase process as intuitive as possible with the least amount of complications. The easier the purchase is to make, the less thought a consumer will put into pressing that “checkout” button. Ultimately, Amazon needs to continue to find its identity with new leadership and continue to innovate and challenge the market to keep itself on top of the world and e-commerce.

Bibliography:

[1] “Topic: E-Commerce Worldwide.” Statista, https://www.statista.com/topics/871/online-shopping/

[2] Droesch, Blake. “Amazon Dominates US Ecommerce, Though Its Market Share Varies by Category.” Insider Intelligence, Insider Intelligence, 27 Apr. 2021, https://www.emarketer.com/content/amazon-dominates-us-ecommerce-though-its-market-share-varies-by-category.

[3] Ballard, Barclay. “AWS Is Now a Bigger Part of Amazon's Overall Success than Ever.” TechRadar, TechRadar Pro, 3 Feb. 2021, https://www.techradar.com/news/aws-is-now-a-bigger-part-of-amazons-overall-success-than-ever.

[4] Gupta, S. K. “Amazon SWOT 2021 | SWOT Analysis of Amazon – Business Strategy Hub.”

Business Strategy Hub, Business Strategy HUB, 6 Sept. 2020,

https://bstrategyhub.com/swot-analysis-of-amazon-amazon-swot/.

[5] “Ecommerce 101 + History of Online Shopping (2021).” BigCommerce, 8 Dec. 2021, https://www.bigcommerce.com/articles/ecommerce/#ecommerce-timeline.

[6] EASTER, MAKEDA, and PARESH DAVE. “Remember When Amazon Only Sold Books?” Los Angeles Times, Los Angeles Times, 20 Nov. 2017, https://www.latimes.com/business/la-fi-amazon-history-20170618-htmlstory.html.

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