Amazon is a leading electronic commerce company headquartered in Seattle, Washington (Gallaugher 119). The aim of this paper is to explore how business model and business strategy can be used for gaining a competitive advantage in the market. The overall structure of the paper takes the form of three sections. The first section of the paper will compare Amazon’s business model and business strategies to that of another tech giant—Apple.
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The second section will be concerned with the brand-building benefits of the use of data by the companies. The final section of the paper will analyze two-sided network effect of Amazon Marketplace and how it is used by the company to improve its competitive standing. The paper argues that the business model of the online retailer hinges on long-term investment and the development of technology, which is recognized as one of the main advantages of the company. It also highlights the importance of Amazon’s two-sided network effect in the company’s pursuit of the top position on the market.
Business Model and Strategies
Now an e-commerce giant, Amazon was not profitable during the first years after its establishment. Nevertheless, eventually, the company was able to become one of the major online retailers that provides their customers with thousands of items from categories that include, but are not limited to, consumer electronics, books, movies, groceries, beauty products, apparel, sporting goods, and toys. The company’s success was possible due to the business model the retailer chose.
According to the founder, Jeff Bezos, it is more crucial to focus on long-term investments and developments rather than engage interventions that provide profit but are also short-term. Amazon’s founder expanded warehouse capacity and examined e-commerce operations. He also focused on developing one of the biggest cloud computing platforms. Furthermore, one of the best-sold types of e-readers was also introduced by Amazon (Kindle).
As it can be seen, the company’s business model consisted of long-term investments and operations that eventually led to high profits. According to Bezos, the three features of the Amazon business are the following: large selection, positive customer experience, and low prices. All of these features are interdependent and allow the company to gain a competitive advantage in the market. The business strategy of Amazon also targets third-party sellers, which are allowed to sell their products using the website. Thus, local professionals have the possibility to provide their services or goods, while Amazon attracts more and more clients who use both the services of the local professionals and of the website itself.
Amazon uses technology as the major support for its processes. For example, Amazon warehouses are tied to technology since it allows the company to provide services as fast and as efficient as possible. This business strategy allowed Amazon avoid the mistakes of the past, when wares were packaged manually. This significantly slowed down the whole process. Furthermore, the company also tracks productivity in warehouses and any errors that occur.
Apple is a multinational tech giant that specializes in the production of consumer electronics, software, and online services (Noren). The company’s business model has been highly influenced by one of its founders—Steve Jobs. Apple’s line of business can be divided into eight major elements: iPad, iMac, iPhone, iTunes, iPhone, computing software, Services, and Accessories (Noren). Apple sells its products using the mass market retail channels in which the following business models are applied: manufacturer direct model, traditional retailer model, and wholesaler model. The company’s pool of profits has substantially expanded after the inclusion of the iPod, iPhone, and iPad lines of products. The sales of iPhones alone are responsible for the biggest share of the company’s revenues.
The tech giant’s approach to outperforming its competitors can be defined as “disruption through better design” (Noren). Even though after many years of staggering success it has lost a significant share of the PC market to Microsoft, it has managed to enter a new and highly profitable cellphone market. Numerous analysts point to the fact that revolutionary design has allowed Apple to disrupt the industry that has been inundated with other successful manufacturers (Noren).
The company’s ability to continuously surpass its competitors does not solely rely on the ruthless innovation. It is also known for litigations and intimidation that are used as tactics for reducing the competitive advantage of its rivals such as Samsung, Google, Huawei, and LG among others. Protracted legal battles, innovative products, and superb customer service have allowed the tech hegemon to secure its space in what is known as “Apple Ecosystem Lock” (Noren)—a web of devices that use the company’s operation system.
The difference between Apple and Amazon is evident: the first company uses a set of developed technologies in updated but not innovative wares (smartphones and tablets), while Amazon focuses on developing new approaches towards the existing problems (e.g. Amazon Air, robots used in warehouses, etc.). At the same time, the companies also have different approaches towards customers: Amazon focuses on customer experience to ensure that it is as convenient as possible, while Apple persuades customers that their wares are more than just a gadget but, rather, a lifestyle or an experience.
Amazon invests in long-term (sometimes very new) opportunities, while Apple prefers to focus on the existing possibilities that can increase revenues. Furthermore, unlike Amazon, Apple has thousands of physical shops across the globe. Although Apple is a more valuable company, its growth is slower compared to Amazon’s growth. Amazon invests in various services, such as cloud services, Amazon Go, Amazon Fresh, Amazon Home Services, Amazon Prime, Amazon Prime Music, etc. At the same time, Apple’s focus is more limited, although it also provides media services such as iTunes, Spotify, or Apple TV.
Nevertheless, Apple’s growth remains quite slow compared to Amazon’s rapid growth during the last several years. Therefore, although Amazon cannot compete with Apple in being more valuable, it has more chances to grow faster due to its investments in different types of businesses and services. Apple still relies on a product that was developed by the previous CEO; it cannot offer anything innovative to customers, and the number of rivals is growing every day. At last, Apple’s prices definitely cannot compete with those that Amazon provides to its customers. Thus, Amazon’s business model and strategies are more successful the in the long-term perspective.
Use of Data
Amazon’s primary competitive resource is, of course, the large data assets it stores. Using this data, Amazon can see what patterns there are in recommendations, preferences, references, and price tolerance among others. For example, the company often uses A/B testing as a means of evaluation of the effectiveness of its functions. The famous “customers who bought this also bought those items” (Gallaugher 128) feature of many websites was suggested by one of the Amazon’s employees. At first, it was not accepted. After the employee had proved that the scheme was effective, the feature was added to the website, and the revenues grew.
Such data and tests are not applicable to offline stores that cannot evaluate the effectiveness of interventions by only tracking the purchases, references, clicks, and views. Furthermore, such innovations allow Amazon remain the best online retailer because it enhances customers’ experience and strengthens the firm’s brand. Since the company can track customers’ activity, it can also analyze this data and see what interventions are needed. For example, delays in page loading can result in decreased customer activity, which eventually leads to reduced rates of purchases and revenues.
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The company effectively leverages its data assets for personalizing its home page. Amazon uses a patented collaborative-filtering software that compares search requests of its users and predicts what they would like to see when they are visiting the company’s home page. The choice of sales and promotion goals is based on the result of monitoring cookies of millions of Amazon users. The company’s ad offerings are also personalized to better suit interests of its customers.
Target advertising is not a new concept. However, Amazon uses it as effectively as possible to understand customers’ needs and interests. Customer’s activity is tracked; preferences, browsed items, and purchased wares are checked. Then, the company’s software provides the user with suggestions that are (possibly) attractive to this exact customer. It is evident that such tracking systems are not used in offline retail stores; at best, these stores can guess the interests and preferences of loyal customers who frequently visit these stores. However, Amazon can provide such suggestions after one’s first or second purchase – and it is very likely that the software will guess the preferences accurately since approximately 35% of sales were due to firm’s recommendations. What is more, such recommendations significantly increase customer’s satisfaction with the brand (Gallaugher 127).
The unique data mining and analyzing algorithms are also applied to other company-owned websites—Kindle and IMDb (Gallaugher 127). The company’s data mining activities are not restricted to online information: Amazon engages in the collection of offline data to better understand purchasing behaviors of its customers. The brand building achieved with the help of leveraging big data is important for Amazon since it has to compete with such serious rivals as Walmart, Apple, and Google among others.
Amazon’s potential of providing advertisements should not be neglected as well. Although it used advertisements at first as the tool to generate revenues, today it offers advertisement on different services and Amazon-related gadgets. Third-party sellers can use websites that Amazon owns; Amazon ads are often interactive and allow users to see a trailer or play a simple game. At last, Amazon also uses retargeting: an approach where the user keeps seeing the ads about an item he or she browsed on Amazon. Since these ads usually lead to Amazon website, suppliers are interested in those because the customer is more likely to complete the order he or she reviewed.
Amazon Marketplace is the name for items that are provided by third-party sellers and not Amazon. Sellers can store and ship products, but Amazon also provides such services if needed. The advantage of the Marketplace is that it attracts Amazon users by offering discounts and shipping to those who are using Amazon Prime Program. By leveraging two-sided network effects, which allows a business prosper from the expansion of two categories of participants, the company substantially strengthens its market standing (Gallaugher 128). Buyers and sellers are the main elements of Amazon Marketplace that allow the effects to take place.
If there are more buyers who want to purchase specific products, there will also be more sellers of this product and vice versa. Since there is an intense competition among sellers, there is a high chance that customers will stay on the website to look for a better price rather than visit websites of rivals. This, in return, strengthens Amazon’s competitive advantage since it does not only allow customers to see the prices from third-party sellers but also provides the same items as well.
Therefore, customers have the ability to choose among different sellers without leaving Amazon website, which positively influences its capability to compete with rivals and attract more customers. Furthermore, the same sellers can identify “empty” product categories that Amazon can use. Thus, customers who are waiting for updates in this category will be satisfied with Amazon’s suggestions and items, which will also improve the brand’s image and the company’s ability to compete.
The advantages of such approach for competitive standing are evident: Amazon can gather data from customers’ activity on Amazon Marketplace and analyze it, providing more experiments to see what interventions can be effective. Since Amazon is “obsessed” with customers’ satisfaction, it will also ensure that all unreliable sellers are controlled or suspended from sales. Thus, customers’ satisfaction increases, more purchases are made, more sellers are attracted, more data is gathered, and Amazon’s ability to compete is growing.
The company’s success can be explained by a set of specific factors. It values new opportunities and productive investments, it uses data not available for offline firms to improve its brand image and strengthen it, and it uses the two-sided network effect to ensure that customers’ loyalty towards the company will remain high.
Gallaugher, John. Information Systems: A Manager’s Guide to Harnessing Technology, Flat World Knowledge, 2015.
Noren, Eric. “Analysis of the Apple Business Model.” Digital Business Models. 2013. Web.