Thursday, June 9, 2011

The pros and cons of Amazon’s growth and diversification

Amazon.com was founded in 1994 and the site went online in 1995. Since then it is the leading online book selling retailer in the USA. In 1997 it diversified from solely a bookstore into selling music, video, downloads, general electronics, apparel, furniture, food, and toys. In addition, Amazon has established separate websites in Canada, the United Kingdom, Germany, France, Italy, Japan, and China. It also provides international shipping to certain countries for some of its products. The growth and diversification is part of the strategic planning of Amazon.com which aims to provide a “one stop shop” for their customers.  Amazon.com established that there are three areas that are of great significance to the customers: selection, convenience and price.  Nothing epitomizes this better than their landmark e-book product Kindle which has by far the biggest available electronic library; instant downloads globally and it is considerably cheaper than traditional products. There are two strong values that are practiced by Amazon.com; these are customer satisfaction and operational efficiency. These two values complement Amazon.com’s operational strategies in achieving and maintaining an effective competitive advantage and encouraging employee and corporate performance. (Henderson, 2009)
According to the above information the pros are:
- Leverage of economies of scale: One example would be in storage and distribution where they are taking advantage of existing fixed assets and service contracts;
- Increase the power of the Brand: The one stop shop concept;
- Increase market share:  In May 2006, Amazon.com launched its grocery website and about 1,000 non-perishable items were on its virtual shelves. ;
- Diversify client base and create product cross pollination: If they buy books they should see on the website that you also sell reading glasses?
- Strong marketing platform to gain new revenue streams from existing customer base ;   If they buy books you can market reading glasses directly to them¿;
- An important part of the Amazon.com sales comes from diversification as it is on the table 1.0 item effectiveness; they sold 11,082 billion of electronics and others that is not a book.
And cons:
-Overcoming established brand loyalty ( Amazon.com faced stiff opposition from FreshDirect and Peapod upon entry into the e-grocery business);
-Cost of entry into to new business verticals;
- Complicating the storage and distribution model;
- Diluting the brand by overreach;
- Diversion of core resources to non-core competencies;
While the diversification of the Amazon brand has merit, I would suggest that globalization is a more lucrative and achievable goal. For a company that has achieved the status of number 1 media outlet in the world largest market (USA) the global effort seems ludicrously anemic. The fact that Amazon only offers web services in only 7 other countries indicates a lack of global ambition and a lack of understanding of their role as market leader, that they should developed more. As a result Amazon has opened the door for local imitators and has left the door open for competitors to globalize the Amazon concept around the world.



The impact if Amazon.com became a family of brands could be a disaster for their strategy for many reasons ; First, if their focus is on efficiency and maintaining the lowest cost when they split up they will lose certain economies gained by  centralized branding e.g. They will have to build individual web sites for each one of the brands and then it will be hard to minimize the increase in fixed costs for all the maintenance of each site therefore the sales must be increased much more than the costs to maintain a lean culture. Second is the marketing, as we can see on table 1.0 they already have a name synonymous with reliability, creating related brands could create lack of recognition and create an unintended and unwanted dilution of the brand. Third point is the operating efficiencies, how they will keep the efficiencies of the process with so many brands to take care, again this will affect the prices for customers. Also could be difficult for Amazon.com grow global with different brand names in different countries, would be a greater advantage to maintaining a single brand name worldwide if possible. The last one is the service, it will become increasingly difficult for them to manage all of the diverse operations and still maintain the high quality of service. A personalized service for each one of the brands could be a resource challenge and negatively impact the quality of the service.
On the other hand if Amazon became a family brand also could be good for the business because more diverse customer base improves the business’ security and if problems arose in one of the brands, it would not necessarily impact the whole business. It could also be an opportunity to creating new identity in a specific consumer market and through excellence make that brand a market leader. This new brand would be associated with excellence in the specific market and could achieve a competitive advantage ahead of the competitors.
On the internet the term e-business describes a wide range of business activities, where Barnes and Noble, and Borders are include offering a service called e-commerce. The fact is that amount of trade conducted electronically has grown extraordinarily with widespread Internet usage, and many people believe that the e-business as a major driver of economic growth for rest of the century, as we can see on the projection of the sales on Amazon.com (NASDAQ:AMZN) follows with projected earnings growth of 30.40%, also Barnes and Noble  only in the first quarter in 2011 had  increase of 64% on web sales to $343.5 million from $209.5 million in the third quarter of fiscal 2010, and Borders had a 32.2% increase in the first quarter (INTERNET RETAILER) as we can see there is a big opportunity on the internet for Barnes and Noble and Borders to extend their market. As we can see in the table 1.0 Barnes and Noble are known as a company who provides a large diversity of books, I believe that they should use this advantage to try to sell a large diversity of another product they already has a good reputation on the internet because of this I believe that they could extend their market in the same way as Amazon.com, also they have to explore more their konwhow on e- commerce and them sell more products.  Making strategic decisions regarding tactics and acceptable outcomes Barnes and Noble can implement very well in order to operationally a good perform.
Nowadays many companies offer virtually the same products, and what will make a big difference when the choice by consumers is the service, if the customer service at Borders are excellent (table 1.0) they should extend their markets as a Amazon.com, because the market on the internet is growing and the opportunities are massive and who can provide a best quality service probably it will have a competitive advantage on the e-business.
 To open a physical store today there are plenty of important points to take into consideration such as: Point: The location selection is critical when they are opening a physical store. The location will have a direct impact on customer choice and this convenience factor will have a direct impact on sales. Stocks: Having adequate stock in a physical store is crucial because, depending on the product, it is unlikely that a customer would return the next day to verify that the product has arrived. Rather, it will the same day to the next store that has the product for sale and they will make the purchase. Price: The best price is a big advantage but it has to be evaluated the high cost of maintaining a physical store, and in this case can be difficult to maintain a very competitive price. Hours: It is important to have alternative schedules in order to meet demand. People: to operate shops they will require far more employees than they have today. By example, Barners and Noble has almost 40 thousand employees (table 1.0) most of them work in the shops. The big benefit of bricks and mortar outlets is perhaps an increase in customer confidence because many people are still suspicious of purchases online where they don’t know who they are dealing with also do not know where you can go to complain verbally. Others think it is dangerous to conduct credit card transactions online and it is true that one of the biggest problems facing e-business is the protecting consumer privacy and conducting transactions in a secure manner. Considering the possible costs of all these points above to expand their distribution chain it would not be a good strategy because all these costs will have a direct effect on the net income, as you can see on the table 1.0 the effectiveness between Amazon.com, Barners and Noble and Borders where Amazon.com has the biggest net income/sales than the others who have shops, this reinforces the idea that to include some bricks and mortar outlets is not good strategy for Amazon.com.
Appendix 1: Table 1.0

AMAZON
BARNERS AND NOBLE
BORDERS
Functionality
Prime membership which offers reduced shipping
Browser history which tracks favorites and trends
They charge for a membership program
have greater resources, longer
History, more customers, and greater brand recognition.
Their membership program is free
Design
Very organized section for searching
Clean, Easy, Comfortable colors
Confused with so many “buy now”
Content
Generally their prices are lower
Amazon does offer a larger choice of  product categories ranging from books to automotive parts
Generally their prices are higher
Offer books and a lot of electronic and gifts

They have a huge amount of books and music with a small amount of electronics and gifts
Originality
Online shopping for hundreds of thousands of items
Lower Prices on Millions of Books, more customers, and greater brand recognition.
The place for book lovers, have greater resources, longer
Histories
Professionalism
Reliable name

Provides a large diversity of books
Customer service is excellent
Effectiveness
Net income: $ 902 millions
Sales 2009: $ 24,51 billion 28% increase over 2009. $12,774 bi are books, music, DVDs, $11,735 are electronics and others.
Employees: 614.
Net earnings: 36,644 mi
Sales 2010: $5,8 billion, decreased 4.5% from 2009
Employees: approximately 40,000 full- and part-time
Net income (loss): $ (109.4 millions)
Sales 2010: $2,65 billion (Down 15% from 2009, excludes international)
Employees: 8,500 full-time, and approximately
12,100 part-time employees.


References
Amazon.com Annual Report 2009.
Borders Group Annual Report 2010.
Barnes & Noble Annual Report 2010.          Access: http://www.barnesandnobleinc.com/documents/bn_annual_report_2010.pdf

Henderson, Harry. 2009. ENCICLOPEDIA OF COMPUTER SCIENCE AND
TECHNOLOGY. Revised Edition

INTERNET RETAILER portal do e-commerce intelligent E-commerce drives Q3 growth for

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