Amazon dominated online retail in 2017. They claimed 45%-50% of all online sales on Black Friday, bringing in an estimated $1 billion dollars. They’ve managed this and many other feats by staying ahead of their competitors in both the online and physical retail spaces. But what enables Amazon’s competitive advantage and how have they maintained it to reach a staggering $701.5 billion market capitalization?
By: Jack Sawyer
To answer these questions we first have to understand how a company creates a competitive advantage within the context of their industry, and then what makes it long lasting and sustainable. In order to achieve this a company needs to create a VRIO resource. A VRIO resource is valuable, rare, hard to imitate, and lastly the company must be organized to capture its value. If a company can create and maximize a resource in this fashion, they have created a sustainable advantage.
When Amazon was founded in 1994 by Jeff Bezos, it started with a mission “to be Earth’s most customer-centric company, where customers can find and discover anything they might want to buy online, and endeavors to offer its customers the lowest possible prices.” This statement highlights Amazon’s VRIO resource - their attention and dedication to the customer. Although one could argue that every company tries to do this, Amazon differentiates itself through its unique approach to customer satisfaction. This unique approach stemmed from Amazon’s CEO, Jeff Bezos - stating, “...We start with what the customer needs and we work backwards” (Baldacci). One could say that Jeff Bezos is the VRIO resource and in many respects he is because he has created this culture of customer centricity. However, with Amazon expanding into a multitude of new markets he cannot be there for every decision and so it now goes beyond him. Thankfully, from Jeff Bezos’ unwavering focus on the consumer, he has in turn created a company culture that is obsessed with the consumer. This approach to business is valuable, rare, hard to imitate, and organized to capture value.
Customer centricity has been the priority from day one and the moves Amazon has made continually demonstrate this dedication to the customer. An example of this is in their ability to identify and exploit the stress points consumers have in physical retail stores. With Amazon being an internet based company, they have the ability to beat out physical retail competitors on price because they don’t have the high fixed costs associated with traditional retails stores. Another advantage comes in the form of large product diversity without the risk of stock outs. Amazon is able to do this because they understand their customers, utilizing their website they can track customer behaviours and then apply these statistics to their inventory. The result of this is a long tail distribution model. By looking to the consumer and the problems they experience in physical retail, Amazon is able to create a loyal customer base and this in turn has created a strong network effect.
With more and more online retailers popping up, Amazon needed to push the boundaries of its VRIO resource. Amazon needed to give their consumers more value and in order to do this they needed to understand the consumer of tomorrow. The VRIO resource of a consumer centric culture evolved to become one in which the company would take risks on new projects and adapt quickly in order to try and meet the needs of the customer of tomorrow, whether they were obvious or not. The Prime membership is an example of the VRIO resource evolution. The program initially allowed consumers to get two-day shipping for $79 a year, but over the years it has grown into an invaluable service that as of 2016, 63 million members use. The membership has increased to $99 a year, but it now offers video streaming, music streaming, photo storage, and next day delivery. To put this in context, Spotify charge $10+ for just music streaming. The amount of value offered in this package creates huge incentives to be an Amazon customer. The Prime service demonstrates how Amazon has continually placed the consumer at the heart of their decisions and how they are constantly looking to provide as much value as possible.
Understanding the customer of tomorrow is challenging and with one success story there also lies many failures. Jeff Bezos has admitted that many of the company’s ventures have been scrapped, remember the Fire phone? It ultimately failed, but without these efforts to innovate on the customers behalf, the company would not be where they are today. And while their have been failures, when they win, they win big. An example of this is in Amazon’s cloud computing division, which now makes up 10% of the companies revenue (Q3-Q4 2017). This dive into cloud computing also comes back to understanding the customer of the tomorrow - or maybe in this instance, the customer in 10 years. The idea to sell cloud computing initially started from within a division of Amazon. In 2003, Benjamin Black was running a website engineering team at Amazon and realized they could sell infrastructure as a service (IaaS) and pitched it to Bezos. He approved the project and set up a new division that would have the creative freedom to explore the technology. Benjamin didn’t expect it to become the powerhouse it is today, but with Bezos recognizing the potential, they were able to work on the idea before Cloud Computing had came into the mainstream. As such, the company was able to experiment with the technology, shape it towards the consumers needs, and in the end create a product that was years ahead of competitors. Today Amazon Web Services is continually ranked among the top cloud computing services. This is an incredible achievement considering it is just one of their divisions and other competitors like Salesforce and SAP are for the most part, purely focused on this technology.
By putting the customer at the heart of the business, Amazon have managed to create an immense value proposition for the customer. As a result, they have gained a loyal consumer base and managed to continually foresee and/or adapt to market trends. Utilizing this customer centric culture has guaranteed Amazon to remain competitive in whichever industry they choose to enter. But as Amazon gears up to create a new campus and go into even more industries will they be able to maintain a VRIO resource?
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VRIO Image: Boston University, Professor Furman, SI422 - Fall 2017