Important questions when looking at the Amazon business model are: What defines core business? Is it the product, intellectual property, process, business design, or the clientele? Many companies today cannot be said to be in a certain business because they have diversified both in product and every other aspect of business. The traditional view of core business is both changing in terms of meaning and significance.
There is freedom to choose and capital is abundant for some companies while many other companies are up for sale. There are, therefore, many acquisitions that are of businesses not related to the original line of the mother company. In this write up, we shall look at the case study of Amazon and how it is redefining core business in its business model amid the pressure from Wall Street to mind the store.
Core business is the essential, main or the primary business in which an organization is in. For a long time, it has been emphasized that organizations venture in one main business and run by managers who understand the core business (Bruhn 2004). The departments therefore had to not only work well but also coordinate with other departments to facilitate success of the core business.
The activities of the department that have to be coordinated include the market sensing process, the new offering realization process which involves research and development, customer acquisition process, customer relationship management process, and also the fulfillment management process.
A business model is the rationale behind an organization’s choice of value creation and how it captures and delivers it. Business model creation is part of business strategy. Theoretically, it refers to several aspects of the business including its purpose, offerings, strategies, structure, operational processes, infrastructure, strategies themselves and also the policies.
The organization may explicitly or implicitly employ its business model since it will have to create value. In this whole process, it will have to entice the customers to pay for the value and so it is a proposition of what the customer expects in terms of product, how they want it and how the organization is aligning itself to meet those needs of the customer (Lieberman & Montgomery 1988).
It is also upon the business model that an organization is classified. In business modeling, the business model should be seen to be in connection with the main goals of the organization as stipulated in the strategic business objectives, clear cause and effect linkages of competencies and expected outcomes, and maturity level of the business.
This approach would help identify the sources of synergy and disconnect between the strategy and model and also the processes involved in the business (Laux & Liermann 1997).
Some examples of business models are; bricks and clicks business model with both online and offline ordering and picking, collective business models with several types of businesses and professionals, direct sales model, distribution business model and cutting out the middle man model.
Some others are franchises, online auction model, professional open-source model and monopolistic business model. These are just a few of the many business models that exist.
A company’s business model has to be innovative if it expects to beat modern odds. Sometimes, an organization will need to change its business model to competitively face the arising circumstances. Some changes that may call for a change in the business model include a change in the business environment, competition, value creation and extended enterprise.
In summary, the business model will have to be reflected in the competitive strategy, growth, market segments, value chain structure, revenue model and more importantly, the value proposition; all centered to innovation (Dunning 1981).
Customer value proposition
It is the description of the customer problem, the solution to the problem and the value of the solution as viewed by the customer. A company, if it has to stay in existence, has to deliver customer value proposition to a market. The whole concept of competition is about creation and capturing of value (Laux & Liermann 1997).
People purchase because of the value they attach to what they desire. Any company thus struggles to influence the value perception of the customer and describe its unique advantage. Unless customers enjoy buying from you, they would otherwise not do so. Even a monopolistic market has its limits.
The customers will find fulfillment if there is uniqueness, attribute ownership, there is good heritage and if your philosophies and values match theirs. It is the concept in which advertisers who use testimonies use in their strategy (Boyett & Boyett 1996).
In summary, customer value proposition is a skilful integration of good ideas, fair price and emotional considerations. Once these are in place, the business is at a competitive advantage compared to its competitors.
Amazon’s corporate evolution
Amazon is a business of its kind and has of late attracted attention due to its trail of impressive growth. It has kept on embracing transformational growth sending its tentacles into different interests while still trying to retain an aspect of core business.
Amazon started as an online book business and this was already very innovative as it was built around a changing customer value proposition bringing another view of the book industry (Burgelman & Meza 2001). It then went beyond books to all kinds of consumer goods that could be easily shipped. Its view of core business at this time started changing from that of a product to a business design.
Later the business ventured into commission based brokerage to traders of used books and then to third party sellers. It was therefore no longer a sale only but a sales-and-service model. In 2002, the company then ventured into web services, a field in IT and so different from its shipping and trade facilitation business.
Over 200,000 outside web developers were giving free help. 2007 saw Amazon set up lab 126 that launched its first product, the Kindle e-book reader threatening to disrupt the publishing industry. This saw 500,000 e-books for kids sold in the first year.
E-books on Amazon are now a booming business and have greatly expanded. Today, Amazon offers world’s biggest selection and is seeking to be the most customer centric company.
They offer millions of unique new, used and refurbished items in several categories like jewelry and watches, health, food, sports, books, electronics, toys and many other categories. Amazon has shown ability to find new opportunities to serve a different type of clientele or serve the same clientele in a new way and still retain value in the old business.
Amazon.com: a case in point
Amazon used internet as its only method of selling goods to its customers. It has some competitors like Barnes and Noble and also Borders. There are also others like eBay and Google. The competitive advantage that Amazon has over Barnes and Noble is that its costs are significantly lower as the competitors use brick and mortar as their distribution channel (Brandenburger & Nalebuff 1996).
Amazon has no storefronts and the main distribution warehouse can be located anywhere even away from densely populated areas where other conventional businesses would like to have their stores located. This allows Amazon to pay cheaper in terms of rent as it locates its warehouse in low rent areas.
Due to the various ways in which Amazon is able to avoid costs, it is able to deliver items at prices lower than market prices and still generate profit.
Other competing online booksellers are unable to deliver services as those of Amazon due to its recent boom, and its cost efficient way to shop for goods (Leschly & Sahlman 2008). Despite the attempts to use internet to sell their books, the competitors have not been able to overcome the overwhelming reputation of Amazon.
However, there are other new entrants that are gaining popularity and that are now real threats to Amazon’s business. Google is one such business whose entry into the market attracted overwhelming interest from customers. The market is therefore showing stiffer competition since Google is a well known and well connected competitor.
The current trend of Amazon makes it difficult to classify its business model. Instead it seems to be combining different models and no single one is sufficient to entirely sustain competitive advantage. It could also be said that it has created a new business model.
This new business model uses the synergy of various benefits to create value for the customers. Some of these benefits are: shopping convenience, speed, discounted pricing, ease of purchase, wide selection, reliability of order fulfillment and lots of information that enable decision making (Campbell & Collins 2010).
In its operational strategy, Amazon has managed to enhance its competitive strategy through cost leadership, customer differentiation and focus strategies. Rather than talk of core business, Amazon would rather talk of core capabilities and world class core assets. It is seen to make calculated moves in transforming capacities into profit centers.
Elastic compute cloud
As one of its recent models Amazon ventured into leasing computing horsepower over the web which is a very welcome solution for those in businesses that will require buying of servers. It is an equivalent of leasing a server at a cost of $876 per year or at a cost of ten cents each hour (Leschly & Sahlman 2008). These kinds of diverse investments are part of what made eyebrow rise on Wall Street.
They wondered why, despite Amazon spending billions of dollars developing its business model, it could venture into such businesses that are far not related to the core business.
It shows Amazon does understand that the solution to sustained success is business model innovation. While many see Amazon as over committing its capacity into new ventures, others see that any of these ventures could grow into blockbuster businesses like the e-Books sector.
The logic behind expansion of product range
Amazon’s case can in one way be seen as that of William’s Inc. William’s Inc. is a steel pipe manufacturer that ventured into manufacture of pipes that transport internet. In the view of the company the concept in the business is the same and in little wonder, both areas are vastly profitable. Amazon’s venture into a variety of products is firstly to exploit its distribution systems maximally (Campbell & Collins 2010).
Most of the products that Amazon sells will use the same concept in distribution as that used in the book business. Just as many companies would enjoy the benefits of economies of scale, so is the case of Amazon. The question may arise if some products like the Electronic Compute Cloud are still in this category.
Companies sometimes want to harness their core capacities and capabilities in a way that not only sees the use of the resources but also in ways that are profitable and innovative. Product and customer differentiation are strength to the company.
It is one thing to build a successful business at a particular time and another to build a business that is successful in all times (Boyd 2002). It therefore calls for business managers to keep evaluating if they are remaining relevant in times of change or if they will be phased out by newer competitive businesses.
It calls for continuous business process reinvention and other strategies that will keep the business relevant to its customers at all times. Amazon is not only an example of a business exploiting innovative business models but one that has no limits in the way they create profit centers.
It is an example of a business reinventing its processes to suit changing circumstances of environment, client needs, and economy. It can be seen as logical to have one profit center still so efficient when the others are hit by inevitable circumstances.
Amazon constantly changing business models can be seen as an ingenious strategy to remain relevant to customers (Byers 2006). At such times when even customer preferences change so fast, Amazon is still able to prove itself efficient and a good preference to customers.
Businesses should therefore make calculated moves without fear to venture into some innovative products as this will help bring them to a new level of competitiveness.
Amazon can be said to be enjoying the benefits of value creation through shopping convenience, speed, and ease of purchase among other benefits. Its business model is a unique one that has seen some other businesses try to mimic and is a potential blockbuster business maker (Leschly & Sahlman 2008).
List of References
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Brandenburger, A. M., & Nalebuff, B. J., 1996. Competition. Journal of Innovation, 12(3), 6.
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Burgelman, R. A., & Meza, P., 2001. Amazon.com: Evolution of the e-Tailer. Graduate School of Business, Stanford University, Case No. SM-83, 32-34
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Leschly, S., & Sahlman, W. A., 2008. Amazon.com – 2005. HBS Case No. 9-803-098, p45
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