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Case Study

Case Brief for Amazon.com

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Case Brief for Amazon.com

Introduction

Founded in 1994 by Jeff Bezos, Amazon.com has grown to become one of the largest online retailer companies in the world. The company, which started as an online bookstore, has grown to become a diversified retailer, dealing in all ranges of products from furniture to foods and electronics. The company also produces consumer electronics and is a major provider of cloud computing services. However, the online retail industry has grown over the years with many retailers in the markets and diverse customers who want different categories of products. With stiff competition in the industry, the company has been adopting new methods and strategies for doing business to maintain and expand its market share in the industry. Some of the strategies, however, may not be the best approaches for the company and could affect its profitability and business operations. This case brief looks to identify some of the issues that could cause ineffectiveness for the company and provide recommendations on how the issues can be dealt with.

Analysis

The major issue in Amazon’s strategy is putting too much focus on areas outside the core business of the company. While this is important for the company to maintain customer satisfaction, it may lead to the company slacking in its core business, which is its major profit-making operation. The online retail industry is always growing, and there are new entrants in the market who pose as competitors for Amazon.com. Some of these competitors include eBay, Apple, and Wal-Mart. These competitors are always coming up with new products, technologies, and strategies that threaten Amazon.com. To keep up with the competition and changes in the online retail industry, Amazon.com has had to diversify its operations to areas outside its core business. This strategy is good for the growth in business operations of the company and ensures maximum utilization of the company’s resources and capabilities. While this strategy has played a significant role in maintaining market dominance, it is clear that Amazon.com has recently had excessive ambition in diversification. This can lead to ineffectiveness as it can lead to the company expanding into too many directions at the same time.  Consequently, the core business will suffer due to a lack of attention and insufficient allocation of resources leading to a downward trend in profits.

To expand its growth and dominance in the market, Amazon.com has been implementing strategic policies that increase its sales but limit profits. While growth is essential for the sake of maintaining dominance in the market and reaching new markets, profit is quite as significant as it is the core reason for the existence of the business. Strategies for growth expansion have produced positive results for Amazon.com as the company has been enjoying a steady increase in its sales. Between 2009 and 2010, the company reported a 39.6% in net sales and a 40.6% change in net sales between 2010 and 2011. However, while the net sales have been rising, the profit margin has been decreasing over the same period of time. The profit margin decreased from 3.7% in 2009 to 3.4% in 2010. The profit margin further decreased to 1.3% in the year 2011. The decreasing profit margins will eventually lead to poor operational efficiency by the company. Although the company is increasing its sales, it’s lower than the industry’s profit margins shows that business operations are not being managed effectively. Low profitability for the business affects it in many ways. It may prevent the company from increasing its expenditure on other important factors for the company, such as marketing expenditure. Competitors could, in return, make use of the lack of marketing by the company, and Amazon could end up losing the market dominance it so much wants to maintain with these strategies that sacrifice profitability.

 

Amazon.com’s growth strategies have always included acquisitions. In 1998, with only five years of inception, Amazon purchased Bookpages, PlanetAll, and Junglee companies. The company has continued with this strategy in its years of existence so as to grow its market share. The company purchases those companies that align with their customer-centric mindset. This is evident in its purchase of Zappos shoe retailers in 2009 and Diapers.com in 2010. The acquisitions have enabled the company to expand its market share and establish dominance in the online retail industry. While the company has used the strategy of acquisition to expand its growth in the market, this strategy may be ineffective in the future growth of the company. Too many acquisitions will result in negative financial consequences for the company as the returns form some of the acquisitions may not be profitable. The company’s strategy of acquiring companies unrelated to its business operation may also lead to ineffectiveness in the allocation and management of resources between the different sectors. The management of Amozon.com has put too much focus on acquisitions that it has become detrimental to the internal development of the company in areas such as human resource and marketing strategies.

Recommendations and Justifications

Amazons’ focus on growth and market expansion in order to maintain dominance in the online retail industry is good. However, some of the strategies that have been put in place for attaining growth are not only ineffective but causing constraints that could lead to the long term downfall of the business. To prevent this, the company must implement strategies that, while focusing on the growth of the business, still focus on the internal development of the organization. The company also needs to implement strategies that, while allowing for growth, also maintain the profitability of the business both in the short term and in the long run. The company needs to pay more attention to its core business instead of putting most of its attention and resources to areas outside its core business. In order to increase its profitability, Amazon.com needs to shift its focus from increasing sales to ensuring that the sales are profitable. The company should cut off the sale of products that are not profitable enough and have low-profit margins. The company should then concentrate more on those products that are responsible for most of their profits and build systems that ensure that the sales of these products are well maintained.

Majoring too much on acquisitions has proven to be costly in terms of money, resources, and reputation for the company. To avoid these costs, Amazon.com should consider focusing on alternatives to acquisitions such as scaling, internal development and innovation, and alliance formation. Through scaling, the company will be able to grow its market share by selling more of its products in new markets. Instead of attempting to buy companies that deal with other products, Amazon should instead try to internally develop their own new and innovative products that may even be better than those of the competitors. Forming alliances instead of acquisitions is less resource-intensive and utilizes the capabilities of the partner, reducing the strain on the acquiring company.  The company should also put more focus on its internal operations, such as managing its human resources by creating better employment policies and compensation practices. This will help in reducing the pressure that the organization faces form employees, consumers, and unions regarding its employment and compensation.

 

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