Date : May 26.

2017
From : Sanjana Agarwal, Business Strategy
Analyst
Subject : Amazon Competitive Position and
Analysis

Introduction

Amazon is now the largest internet- based retailer in the world with market sales of $136 B and market
capitalization of $427 B1. It has already surpassed the likes of Walmart and Target and is only behind Alibaba.

Jeffs belief Amazon just like McDonald has an imitable business model. And it still is a huge multibillion
empire, mainly because of the Brand Loyalty it has cultivated; the logic behind the naming and logo is pretty
wicked! Example: Amazon (A) would always be listed in the top in an alphabetized list of companies, the
logo with an arrow pointing from A to Z i.e. provides all conceivable products with a smile.

In addition to competitive pricing and recommendation engine their other services like Prime membership,
which is a magnet for customers; in addition to prime videos, it also gives them access to online music and
free shipping. Prime members paying 11$/month (99$/yearly), are statistically proven to be heavier spenders
than regular customers. Amazon reported a rise of 49% in annual subscription that is approx $2 B2. Additional
vestigial services like Amazon Lockers (for delivery and pickups) and Amazon basics (chargers, adaptors, etc
at a sustainable cost).

This leads into their environment analysis. They cater to audiences across the world by offering a different
website in different countries customized as per the local needs in various languages. Example: They offer
various discounts and promotions relevant to the Indian festival of Diwali in November. Their retail shopping
attracts customers who would order online rather than go instore, irrespective of ages.

They introduced kindle that has become a leading icon in the bursting e-book business, with economic to
highly functional and expensive models. Though they started as an online bookstore they now have opened
up brick and mortar physical bookstores and grocery stores (currently in Chicago and NYC). They understand
that with the right model and incentive people do still want to come in and buy physical books. Their
bookstores are hip by design with a recommendation section, customer reviews posted on book aisles,
scanners provided to find further details on their website, hence extending their website design in a physical
world. Their no checkout line grocery stores will be a huge incentive for busy working population.

Echo and Alexa have already revolutionized the smart-home industry. Companies like Philips have sprinted
(successfully) to provide the accessory services like smart lighting. Alexa can control your lights and
thermostat, play music, track appointments, search the web and SHOP to name a few.
Competitor Analysis

Amazon currently has its fingers in numerous pies. Their major business incorporates Content Generation
and Distribution, Bookstore, Retail and Groceries (Exhibit 1).

Netflix is one of their major competitors in streaming content. They both are trying to outdo each other with
huge amounts of money spent in adding original content and onboard other providers and rights for movies,
TV shows, even NFL games. Amazon is to spend $4.5 B on video content this year alone, like they bought a 2
year contract with Fingerprint Releasing a film distributor.

This gives them an alternative profitable stream of income. Their retail competitors like JC Penny, Macys,
Best Buy, Staples, Target and, Sears upping their online presence and giving Amazon a hard competition.
They have a $62 B in fashion revenue helped by competitive pricing, fast delivery and huge product selection.
Its worth waiting to see how the ETSY IPO fares.

They are driving businesses like of Barnes and Noble and other independent bookstores out of business. Like
their new app ($5 discount) allows customers to scan a book and compare (and order) it with Amazons
pricing. Such bookstores are trying a diverse model of book-music, book-caf, etc but failing. Their Amazon
fresh prime competes with the likes of FreshDirect and most recently Google (partnering with WholeFoods
and Costco) 3.

Though Windows Azures subscriptions have risen by 50%4, IBM generates $8 B in revenue; Amazon still
continues being the godfather within cloud services. They generate $6 B/yearly6.

Five Forces Analysis solidifies Amazons flagship within this industry (Exhibit 2). It is difficult for a new group
to successfully enter the online retail industry and makes profits.

Capabilities Analysis

Amazon (similar to Southwest airlines) has established both cost and demand advantage within online retail.
The offer competitive pricing as well as people are willing to pay a little extra for their more competitive
services like AWS and Echo. Their enormous product selection is a huge plus. Amazons capabilities are
detailed in Exhibit 3. These capabilities are built over time.

Strategic Positioning

From their capabilities and industry structure, seems like they have adopted different strategies in different
services. (Exhibit 4)

Example:

In streaming services, they follow a combination of Differentiated and Cost Leadership strategy. They invest
heavily in streaming rights from NFL, production companies and movie rights to original content like Man in
the High Castle. The right metric to find their strategic position within the streaming competitors would be
original content (the most differentiating factor) Exhibit 4.1.
In Retail, bookstores and/or fashion brand, Barns and Nobles, Independent bookstores, Macy, Sears, eBay,
Best Buy, Walmart etc, they again follow a combination of Differentiated and Cost Leadership strategy. With
their competitive pricing they keep their costs lower than competitors. But they invest a lot in advertising and
R/D. There are some bookstores that have managed to thrive despite Amazon like the Harvard bookstore
(unaffiliated to HU) and Brookline Booksmithe. Their book selection extends to low price used books, staff
selection inventory and recommendations, robust website with quick local delivery, blogs and host readings.

In grocery services they are following a focused low cost strategy; since they are just entering this industry.
(Exhibit 4.2) Incumbents like Fresh Direct are already taking leaps to stay ahead in the market, prioritizing
their online user experience (tablet app). Its a Netflix styled app i.e. learns your likes and dislikes. They are
partnering with Foodilys Popcart that will allow users to find and order items from a recipe.

Amazon cloud usage is currently 70% of the market, but Azure is slowly catching up with a projected increase
to 35% (from 20%)9 a revenue of $6.7 B10 (Exhibit 4.3) IBM is directly behind Amazon with a $7 B market
share.

In the new smart home industry, with competitors like Google Home, Microsoft Cortana and Apple Siri, we
still have to see how the market plays out. We are seeing heavy investment by Amazon in advertising for
Alexa. Amazon is working on making it easier for third party apps and developers to integrate into Alexa
which could be a huge plus11.

Conclusion

Amazons heavy investment in R&D, continuous and improved staff training and Jeffs superior leadership has
given them a competitive advantage. He does not believe in sticking to a core value i.e. avoids
stagnation/obsoletion to reinforce Sustainability. They are The Dot Bubble Survivors!

That doesnt mean that are unbeatable. Target, Costco and Best Buy are trying to attract customers and build
brand loyalty with promotions, discounts and free shipping; hence pushback against Amazon. Amazon
understand that people still prefer buying groceries in store, hence Wal-Marts and Whole Foods huge
number of stores, has pushed Amazon into opening their own physical no checkout line Grocery Stores.

They are spending aggressively in international markets like $0.5 B in India, acquiring Souq in the Middle East
and prime membership in Mexico. They are investing $1.5B to build their own cargo hub.

WPP subsidiary (one of the largest advertisement agency) acquired Marketplace Ignition through their
subsidiary Possible. Marketplace Ignition helps businesses to run more successful ad campaigns on Amazons
site. They project Amazons ad business to be worth $5 B by 2018.

Currently their stock is valued at $970! Their stock has generated a return of ~38.1.% in the trailing-12-month
period, compared to ~8.3% in the trailing-one-month period. Its risen ~1.3% in the trailing-five-day period.
This years sales are expected to rise 26%. Sales for next year are projected to be ~$200.7 billion!
Exhibit 1: Amazon and Financial Comparison to Competitors6

TOTAL MARKET
REVENUES GROSS R&D CAP
(in $ PROFIT INVESTMENT (in $
Billions) Forward P/E ROA ROE MARGIN (in $ Billions) Billions) NOTES
Amazon 142.57 88.13 3.62% 14.18% 35.09% 16.09 476.144
Video i.e. Media Content
Netflix 9.51 85.3 2.87% 12.75% 31.72% 0.8521 70.22
Hulu 1 Private Company

Apple iTunes 34 14.76 11.59% 34.57% 38.61% 10.05 804.38

Google playstore 27 23.96 9.67% 15.42% 60.84% 13.95 676.57

Cloud Services

Microsoft Azure 22.6 20.93 6.51% 24.65% 61.30% 11.99 536.55 102% growth in azure revenue
Salesforce 8.86 54.42 0.08% 1.95% 72.19% 1.21 65.03
IBM 79.39 11 7.13% 69.31% 47.03% 5.42 143.83
Retail
Barnes and Nobles 3.95 16.25 1.06% 0.79% 28.61% 0 0.49461 30% income decline since 2015
Macy 25.34 8.37 5.58% 13.39% 35.30% 0 7.13 4% income decline since 2015
Sears 22.14 -0.71 -8.42% NA 20.58% 0 882.92 Quarterly growth declined by 17%
Best Buy 39.4 15.62 8.78% 26.57% 23.49% 0 18.82 Quarterly growth declined by 1%
Staples 18.03 10.43 5.45% -9.35% 25.80% 0 5.92 Quarterly growth declined by 5%
Groceries
Uber 6.5 Private Company $8 B losses
FreshDirect 0.1 Private Company
Exhibit 2: Amazon Five Forces Analysis

Threat of Entry : LOW

The capital required to enter the industry of online retail is high, warehouse costs, vendor contracts, HR costs etc.
This increases the sunk costs. Amazon has an incumbent advantage in this industry, including its license and design
for Echo, no-checkout cashier lines (using deep technology). Contracts with media companies for exclusive
right/contents.
With the high number of big players like Macy, Sears, Microsoft, Google, Fresh Direct, Hulu, IBM, Best Buy; any
new entrant is going to face retaliation. The switching costs for the customers are going to be high like shipping
costs, subscription services.
Threat of Substitutes : Substitute like a physical store is not a threat, esp with Amazon opening up its own physical stores.
Also their competitive pricing makes it difficult for another similar product/service to replace them.
Example: During the holidays Amazon changed their product pricing by as many as 2.5 million times.
Bargaining Power of Buyers : AVERAGE
Amazon is in a highly competitive market, any increase in its subscription pricing will drive the customers to other
service providers. But at the same time customers have fewer options to switch to for a one stop shop i.e.
Marketplace.
AWS itself is a very sustainable and reasonable cloud service for students, with student discounts and promotions.
Bargaining Power of Suppliers : VARIED
Different suppliers have a different power. Example: Media companies (like NFL contract) have a higher bargaining
power as Hulu, HBO and Netflix are also bidding for the same contract. But book sellers and local produce
suppliers have a low bargaining power as Amazon could easily switch to any other supplier.
Intense Rivalry : LOW
Amazon has built a brand loyalty and demand isnt seasonal. Within the industry itself coordination is possible.
Example: Distribution of Amazons ebooks through iPads kindle app.
Exhibit 3: Capability Analysis

Capabilities Competitive Pricing Enabling Businesses Simplicity/Dynamic Platform

Process, Looking at their job openings, we can make The platform consists of Amazon marketplace is a
People/Skills and an assumption they need highly skilled people 1. rules and processes for managing the dynamic and Intuitive platform
Systems/Tech in statistical models and data mining with commercial engine (mobile app too)
experience in ecommerce. 2. reviewer database and community Their recommendation
Their dynamic pricing and optimization 3. apps community engine, example when you
software crawls the internet to find the lowest 4. vendors selling through Amazon order Kane and Able, you start
price of the product (prioritized by most views). 5. digital rights management receiving recommendations of
Its heavily data driven and is done within 6. self published writers other Jeffrey Archer books;
individual business units. Their prices could 7. hesitant publishing partners preempts follow up user
change as many times as 2.5M times a day7. Other examples are Alexas smart search.
Additionally they run numerous pricing control is exposing markets for Philips Their customer care is one of
experiments and simulations on numerous Hue (smart lightning), Lutron Caseta the best in online retail. Easy
products. Lighting, Belikn8, or easy ordering of Uber product return, cancellation of
Inventory management plays a big part in this with voice command. overdue charges (AWS), to
strategy. name a few.
Alignment and Apples secret pricing model helps them stay Their platform avoids lock in. They are proud of their
Sustainability a major player in online retail. They have a Amazon enables writers and Brand loyalty and for good
Cost Leadership model, keeping their costs booksellers; people that want to sell on reason, this being their motto
lower than their competitors by continuously Amazon. and value. The processes they
improving on this pricing model. Making it rare They promote entrepreneurship, have in place has helped them
and inimitable, hence giving them high reputation development at an enormous achieve this i.e. external
sustainability. scale. alignment.
Other barriers of entry being patents to Hence bringing value to all parties. Their heavy investment in
Kindle, Echo, no checkout lines. Their company culture is definitely R&D helps them improve this
Their commitment to Competitive pricing complex; surviving through the dot further.
deters (or motivates, depends on how you see bubble crash gives them a unique
it), other players to at least try to do the same. position i.e. focusing on brand and not
income.
Exhibit 4.1: Strategy Map of Amazons position in Streaming Services
Exhibit 4.2: Strategy Map of Amazons position in Fresh Produce Services
Exhibit 4.3: Strategy Map of Amazons position in Cloud Services
References

1. Forbes #83 https://www.forbes.com/companies/amazon/

2. Amazons Investment and R/D http://marketrealist.com/2017/05/why-is-amazon-burning-4-5-billion-this-
year/?utm_source=yahoo&utm_medium=feed&yptr=yahoo
3. Googles entrance into the fresh produce market http://www.telegraph.co.uk/technology/google/11853317/Google-will-now-deliver-fresh-
food-competing-with-Amazon.html
4. Microsoft Azure projected Sales https://www.bloomberg.com/news/articles/2013-04-29/microsoft-azure-sales-top-1-billion-challenging-
amazon
5. Amazon AWSs market dominance http://www.businessinsider.com/aws-revenue-is-bigger-than-its-four-closest-competitors-combined-2015-
4
6. Stock Related Information https://finance.yahoo.com/quote/AMZN?p=AMZN
https://secure.marketwatch.com/investing/stock/GOOG/financials
7. Amazons pricing Strategy http://www.retailwire.com/discussion/amazons-price-changing-machine/
8. Amazon Echo Details http://thewirecutter.com/reviews/what-is-alexa-what-is-the-amazon-echo-and-should-you-get-one/
9. Microsoft Azures booming revenue growth https://www.bloomberg.com/news/articles/2013-04-29/microsoft-azure-sales-top-1-billion-
challenging-amazon
10. Microsoft Azures growth https://venturebeat.com/2016/07/19/microsoft-reports-22-6-billion-in-q4-2016-revenue-965-million-from-surface/
11. Echos features http://www.businessinsider.com/amazon-echo-and-alexa-history-from-speaker-to-smart-home-hub-2017-5