Amazon's Competitive Advantage
I've selected Amazon as my firm to follow and analyze throughout this semester. With Chapter 2 defining and explaining competitive advantage, I immediately started to think of all of the competitive advantages that we've all grown to know and love from Amazon. As I continued to read through the chapter, I started to think about those same competitive advantages in a different light. When I began applying Chapter 2's definition of competitive advantage, I began to become confused as to whether what I previously thought was a certain advantage of Amazon's really held up. That's what made me think it might be interesting to take a core competency of Amazon and apply the different competitive advantage/disadvantage analysis in order to decide which one applied.
One of the first things that comes to mind when I think about Amazon's core competency is fast delivery. Amazon practically changed the industry landscape and consumer mindset when they began offering free two day shipping via their Amazon Prime membership. Prior to this introduction, if consumers wanted a product within a two day time frame they would either have to physically visit the retailer to make their purchase or pay an additional (and usually quite high) fee in order to have their purchase in time. As consumers have become busier and busier, taking the time out of their schedule to visit a physical retail location has become increasingly difficult so consumers have naturally turned to the online marketplace to make these purchases. Amazon identified this consumer need and chose to make it one of their core competencies to deliver consumer goods in a quick, efficient manner without financially impacting the customer.
What's interesting about this core competency of Amazon is that it could be a competitive advantage or disadvantage depending on how you look at it. According to Chapter 2, competitive advantage is defined as something that creates more economic value than their competitors and economic value is the difference between benefits gained by the customer and the cost of the product/service. The interesting part to me is that if you simply look at each individual Amazon transaction, it could be perceived as a competitive disadvantage due to the absorption of shipping costs by the firm itself.
For example, if a product is purchased from a competitor for $100 and the cost is $30. Their economic value would be $70. If the same product is purchased from Amazon for $100 and the cost is flat ($30) plus the absorbed shipping cost ($20), Amazon's economic value would be $50 which is less than the competitor's $70 economic value. This would usually represent a competitive disadvantage. However, due to the sheer brilliance of Amazon and it's ability to see the much larger picture, they were able to apply the intangible perceived benefit that two day delivery brings to the consumer base. While that one individual transaction may have appeared to represent a competitive disadvantage, the increase in volume of consumer orders the two day shipping benefit brings to Amazon helps convert that to a competitive advantage. For example, if 10 consumers make the same purchase from the same competitor this volume represents an economic value of $700. However, because of Amazon's incredible offer of quick, easy two day shipping, now 100 consumers want to make that same purchase bringing their economic value to $5000 which is significantly higher than their competitors and now a competitive advantage.
I think this competitive advantage/disadvantage analysis (as simple as it is) shows the brilliance behind Amazon. Even though we might not have needed any more proof, I think it's important to note as I'm sure Jeff Bezos and team encountered many many doubters who said this business structure would not work and was not sustainable. However, now we have a consumer base (which I am part of) that essentially demands free & fast shipping and we have Amazon and their forward thinking to thank for that.
One of the first things that comes to mind when I think about Amazon's core competency is fast delivery. Amazon practically changed the industry landscape and consumer mindset when they began offering free two day shipping via their Amazon Prime membership. Prior to this introduction, if consumers wanted a product within a two day time frame they would either have to physically visit the retailer to make their purchase or pay an additional (and usually quite high) fee in order to have their purchase in time. As consumers have become busier and busier, taking the time out of their schedule to visit a physical retail location has become increasingly difficult so consumers have naturally turned to the online marketplace to make these purchases. Amazon identified this consumer need and chose to make it one of their core competencies to deliver consumer goods in a quick, efficient manner without financially impacting the customer.
What's interesting about this core competency of Amazon is that it could be a competitive advantage or disadvantage depending on how you look at it. According to Chapter 2, competitive advantage is defined as something that creates more economic value than their competitors and economic value is the difference between benefits gained by the customer and the cost of the product/service. The interesting part to me is that if you simply look at each individual Amazon transaction, it could be perceived as a competitive disadvantage due to the absorption of shipping costs by the firm itself.
For example, if a product is purchased from a competitor for $100 and the cost is $30. Their economic value would be $70. If the same product is purchased from Amazon for $100 and the cost is flat ($30) plus the absorbed shipping cost ($20), Amazon's economic value would be $50 which is less than the competitor's $70 economic value. This would usually represent a competitive disadvantage. However, due to the sheer brilliance of Amazon and it's ability to see the much larger picture, they were able to apply the intangible perceived benefit that two day delivery brings to the consumer base. While that one individual transaction may have appeared to represent a competitive disadvantage, the increase in volume of consumer orders the two day shipping benefit brings to Amazon helps convert that to a competitive advantage. For example, if 10 consumers make the same purchase from the same competitor this volume represents an economic value of $700. However, because of Amazon's incredible offer of quick, easy two day shipping, now 100 consumers want to make that same purchase bringing their economic value to $5000 which is significantly higher than their competitors and now a competitive advantage.
I think this competitive advantage/disadvantage analysis (as simple as it is) shows the brilliance behind Amazon. Even though we might not have needed any more proof, I think it's important to note as I'm sure Jeff Bezos and team encountered many many doubters who said this business structure would not work and was not sustainable. However, now we have a consumer base (which I am part of) that essentially demands free & fast shipping and we have Amazon and their forward thinking to thank for that.
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