Question

Illustration Capsule 5.1 discusses Amazon’s low-cost position in the electronic commerce industry. Based on information provided in the capsule, explain how Amazon has built its low-cost advantage in the industry and why a low-cost provider strategy is well suited to the industry.

MBA class. Business Strategy and policy class MB 695.

Book: Crafting and Executive Strategy: The Quest for Competitive advantage: conept and cases, 21st edition by Arthur Thompson

Answer 1

Amazon's Business Model: The company's primary competitive advantages are the low prices that it is able to offer, a wide variety of products on offer ranging from digital media to grocery, and convenience of shopping from home or mobile devices with a "same day delivery" option. It also has a cost edge over brick and mortar retailers, since it does not have to manage physical stores.

'Amazon’s consistently low prices on the highest viewed and best-selling items drive a perception among consumers that Amazon has the best prices overall – even better than Walmart.'

Amazon was able to use the technology developed for Internet selling of books and other goods to

Ever wonder why Amazon can provide all sorts of products at very reasonable prices with free or very cheap shipping? The Chart below shows one reason why. Amazon's cost structure is significantly lower than its multi-channel retail competitors.

Amazon often appears to be beating its competition on low prices.

The cascade chart is used to show why Amazon's cost structure is lower. Each reason is documented (e.g., Factory gate pricing/direct supplier pick-up) and the cumulative impact of the 3 reasons are shown. The half-page horizontal cascade gives you lots of room to provide a more detailed explanation on the right-hand side of the slide.

Amazon’s Low Cost Structure

Average MC Retailer cost of Online Sales

Factory gatepricing/Direct supplier pickup

Optimize Inventory Control

Efficient Outbound fulfilment

Amazon’s cost of sale

Amazon has mobile shopping apps and has also ventured into making hardware, such as the Kindle tablets, and plans to start making smartphones. The purpose of these hardware products is primarily to support the sale of content that Amazon offers. This is one reason why margins are kept very low for hardware, and relatively high for content.

Amazon provide greater value to customers by a combination of extraordinary convenience, instant access, and comprehensive selection. These differences would have been sufficient to build a competitive advantage but Jeff had one more idea. He decided to add a foremost valuable difference  —  Low Prices. Amazon would provide both value and low price.