Question

Using the Amazon case please answer the following question:

Describe Amazon's strategic approach to mergers and acquisitions. How has the approach helped Amazon be successful? What drawbacks has Amazon faced from their merger and acquisition strategy?

Answer 1

Answer:

Amazon (AMZN) announced it is buying Whole Foods (WFM) for $13.7 billion on Friday, purchasing the upscale grocery chain for $42 per share—a 27% premium on its share price of $33.06. This is the Seattle giant’s largest acquisition to date, far surpassing the $1.2 billion it spent to buy online shoe seller Zappos.com in 2009.

Over the past week, Amazon rumours did not revolve around a purchase of Whole Foods, but rather that of another company—Slack, a set of workplace chatroom tools, that boasts 5 million users and may be worth up to $9 billion.

The possibility of taking in a rising office messaging tool and a high-end supermarket in the same week is a testament to Amazon’s well-known vastness. The company, which boasts a massive market cap of $469 billion, has expanded so far from its original internet-bookstore mould that anything seems possible.

It’s no secret Amazon pursued Whole Foods to get a real foothold in the supermarket business and boost its food delivery service to compete with major grocery stores. Whole Foods has both the massive infrastructure for food logistics and a reputation of quality.

In general, however, Amazon CEO and founder Jeff Bezos often leave company strategy opaque. To get some insight into its vision, it makes sense to look at the companies it has acquired. Since it went public, Amazon has bought or made large investments in almost 100 companies, according to Bloomberg. (CrunchBase charts its acquisitions alone at 76.) Just over 20 of these companies were acquired or invested in by Amazon over the past two years. For the most part, they fall into a few main categories.

Amazon’s order history

The first category consists of retailers that Amazon has bought to build a bigger Amazon. Whole Foods is included here, as are Zappos.com, Audible, and Shopbop. Many of these services to expand Amazon’s product offerings into newer territory, which may be more competitive. Amazon has also bought companies like Souq.com, which, as the Amazon of the Middle East, enabled Amazon to leap forward in that international market.

It’s not the only consumer category of companies Amazon has dipped into. In addition to buying retailers, Amazon has acquired companies to improve existing consumer products. It acquired an Indian publishing company to give it a leg up on books in the international market, a gaming company, Curse, for its Twitch gaming platform. It’s also bought an Indian payments company to improve its online payments platform, and an AI image recognition company called Orbeus.

Amazon, of course, has also invested in home internet-of-things products like Petnet, a remote pet-feeding device, Rachio, a wi-fi-enabled sprinkler system, and Luma Home, which makes wi-fi devices. None of these investments was an all-in acquisition, but it tips the company’s cards that Alexa may only be the beginning.

The next category takes a step away from the consumer-facing part of the company. Though Amazon’s main business is consumer-driven, the company’s cloud business, Amazon Web Services (AWS), is massively lucrative, taking in $2.56 billion in the first quarter of this year. Its influence is far-reaching: Many websites you frequent use Amazon’s services.

The acquisitions that have fueled Amazon’s cloud business includ Thinkbox, Nice, havest.ai, Iconic, and Elemental. These companies provide technology relating to cloud services that include security and media rendering, which could have uses beyond AWS. Amazon’s devices and Prime content services are nothing if not media heavy.

The breadth of these categories and Amazon’s overall portfolio speaks to the company’s – and notably Bezos’ – outsize ambition more than anything else. But by acquiring a company for almost $14 billion, that’s already apparent. Amazon is just getting started.

Drawbacks

the resources and capabilities that make Amazon such an exceptionally effective competitor are quite distinct from the resources and capabilities that Whole Foods has focused on and developed over a long period of time. As part of a class in strategic management that I teach here at the University of Notre Dame, we compare and contrast two retail businesses with substantially different modes of operation – Whole Foods and Aldi. Whole Foods operates by pursuing a differentiation-based competitive advantage; through ongoing investments in marketing, brand value, customer service, quality, and in-store experience, it targets a particular socio-economic group of customers, attempts to increase those customers' willingness to pay above that of its competitors, and thereby exceed the extra costs incurred in creating this increased willingness to pay.

In contrast, Aldi pursues a cost-based competitive advantage. Its value proposition is to provide acceptable-quality goods, most of which are private-label, at the lowest possible price, with no frills, minimal advertising, and a utilitarian in-store experience. Aldi's focus is driving costs out of its system at every point in the value chain, because the basis of its success is providing roughly the same stuff as its competitors, usually at a lower price. Simply looking at these two descriptions, which one sounds more like Amazon? Clearly, Aldi. In fact, Amazon is probably the poster child for a company pursuing a cost-based competitive advantage.

And it's not just cold and impersonal strategy, but warm corporate culture that could hardly be less similar. Amazon's is a culture of relentless, largely impersonal, efficiency, while Whole Foods has positioned itself as an organization that not only provides healthier, natural food, but also represents "enlightened" values. Consider some of the lines in a recent commercial for Whole Foods: "We are hungrier for better than we ever realized," "It's good for us and for the greater good, too," and "This is where values matter." Take a quick look at the About Amazon section on the company's website, and see if you get the same sense.

Actually, my favorite response to this news was a tweet saying, "I wonder if Whole Foods CEO John Mackey knows that Amazon advertises on Breitbart." Whether or not John Mackey knows, you can be sure that Whole Foods' core customers will find out pretty quickly. A brand is a fragile thing, especially when that brand is associated with such clear social and cultural expectations. Admittedly, Mr. Mackey himself isn't a stranger to cultural controversy. Repeatedly over the last few years, he has angered many of his customers by opposing universal health care and the Affordable Care Act (even once referring to the ACA as "fascism"). But the point is that this response from many Whole Foods stakeholders is because such comments are seen as anathema to the values that the firm and its leader should espouse. And sure, the initial acquisition announcement suggests that Whole Foods will continue to run as an independent entity, but it's hard to see how Amazon could achieve effective synergies by pursuing such a policy forever. As Whole Foods begins to rub up against the parent firm, there's likely to be a substantial culture clash.