Amazon (NASDAQ: AMZN), the e-commerce giant of the world has gained a lot of growth momentum during the previous several years. Apart from robust financial performance and fast growth in market capitalization, it has also found strong growth in the cloud sector. Amazon’s growth story from an online bookseller to the largest e-commerce brand and a leading cloud player has been amazing. Today, it sells and ships millions of products to millions of customers worldwide every day.
Now, when a large number of leading markets are affected by Coronavirus, the leading technology companies including Amazon are continuing to experience financial growth. The market capitalization of Amazon has reached $1.3 trillion and apart from the competing digital commerce brands, it has also emerged as a major competitor for the physical retail brands like Walmart or Costco.
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VRIO analysis of Amazon:
In this VRIO analysis of Amazon, we will analyze the core competencies of the e-retail giant and the resources and capabilities from which its core competencies arise. Apart from that, we will analyze which core competencies give rise to sustainable competitive advantage, or temporary advantage.
Amazon’s Core Competencies:
Amazon is the world’s largest e-commerce brand whose growth has been driven by several factors and one of them is the trust that the company has successfully built. Apart from being a highly trusted online retail brand, the company is known for its focus on customer service. There are several other factors too that have helped the company strengthen its brand image including technological innovation, international business operations, and marketing strategies as well as talented human resources. Amazon is now a well-known brand name in every corner of the world. This core competency is both valuable and rare.
While it is valuable on the one hand, on the other, no other e-commerce firm has been able to achieve the same height in terms of customer trust and popularity. There are very few other firms that hold some competitive strength in terms of brand image but their presence is limited to few markets and achieving the same cult status as Amazon would be both time-consuming and capital intensive for these firms and therefore challenging the supremacy of Amazon in e-commerce is next to impossible for the other digital retail brands whether it is Flipkart, Alibaba or any other digital retail brand including the physical retailers that are offering online sales in their local markets. Therefore, this core competency is a source of sustainable competitive advantage for Amazon.
Customer experience is not just a leading differentiator for the e-commerce brands but also a source of popularity and a driver of demand for digital retail brands. Amazon has acquired a lot of market growth in recent years and one of the main drivers of its growing brand recognition and popularity in both the US and international markets is its focus on customer experience. However, it is not just Amazon but other digital retail firms too are focusing heavily on customer experience and even if their technologies are not as advanced as Amazon, some of them have developed close substitutes that maximize customer convenience.
Due to the intensity of competition in the retail industry, the physical retail firms including Walmart, Costco, and Target are also focusing heavily on customer experience and offering omnichannel shopping for their customers. In this way, while Amazon seems to be ahead of its competitors overall currently, in a little long term this battle would intensify as the other retail brands continue to grow their investment in customer experience.
Walmart acquired a majority stake in Flipkart in 2018, and apart from the Indian market, it is also focusing on providing its customers with an omnichannel shopping experience and innovative delivery options. Overall, customer experience gives rise to a temporary competitive advantage for Amazon. Moreover, this is an area that requires continuous innovation. Winning customer loyalty in this intensely competitive era is a demanding task.
Research and Development:
Research and development at Amazon is a driver of demand and sales as well as popularity. Amazon is the biggest spender on research and development in the entire industry. Apart from its online marketplace, Amazon also dedicates heavy research and development resources to the AWS segment which has seen fast growth during recent years. During 2019, the research and development expenses of Amazon grew to around $36 billion which was higher than any other firm including Google that spent around $26 billion on research and development. Continuous focus on research and development has helped Amazon acquire strong capabilities through superior algorithms that provide product suggestions and make it more convenient for both buyers and sellers to deal on its online marketplace.
While other firms also invest in research and development, in the e-commerce industry especially, there is no match for Amazon’s research and development capabilities. Therefore, it is a valuable and rare as well as inimitable resource. If other e-commerce or physical retail firms try to imitate these capabilities or develop a substitute for them, it will prove both capital and time-intensive for them. In this way, the research and development capabilities of Amazon and its innovativeness drive sustainable competitive advantage for the brand. While it has kept ahead of the other online and physical retail brands through consistent focus on innovation, the company has also developed capabilities that cannot be matched by other technology brands.
Amazon has one of the world’s largest distribution networks. In the retail industry including physical and online retail, no other brand has the same resources and capabilities in terms of distribution. This core competency is among the primary drivers of competitive advantage for Amazon. The international presence of Amazon which has been bolstered through its large network of around 175 fulfillment centers helps the company match millions of sellers with millions of buyers daily. This is why Amazon’s e-marketplace is the most lucrative platform for a large number of big and small sellers from around the world. Its strong distribution network in both the United States and internationally drives most of its sales and profits. None of the e-commerce or retail brands possess similar resources and capabilities and even if any other brand tries to develop similar capabilities that could take the company a very long time as well as a large capital investment. Matching Amazon’s capabilities in this area does not look possible for any other firm in both the short and the long term. Overall, this core competency of Amazon is a leading source of sustainable competitive advantage for the brand.
The large product range sold on Amazon’s e-commerce platform is also a driver of competitive advantage for the brand. Coupled with Amazon’s distribution capabilities, this valuable resource drives a sustainable competitive advantage for the brand. No other e-commerce or retail brand sells such a vast assortment of products as Amazon. As of 2019, the company had 2.5 million sellers on its platform. Amazon’s influence as an online marketplace can also be understood from the fact that every year more than 1 million sellers join the marketplace.
Moreover, as per 2019 data, average, small and medium-sized businesses sell more than 4000 items every minute on Amazon in the United States. Amazon’s influence as an online marketplace is also clear from the fact that the company has helped thousands of SMBs from around the world create more than 1.6 million new jobs in the past few years. All these factors have vastly grown the influence of Amazon in the United States as well as internationally as an online marketplace. This is a sustainable competitive advantage that any other online or physical retail brand would not be able to match easily.
Amazon’s vast customer base which includes millions from the United States and many leading markets around the world is also a source of competitive advantage for the brand. There are several factors that have added to the popularity of Amazon and helped it grow its customer base. One of the leading factors is the pricing strategy adopted by the company. While there are several sellers selling similar products on the Amazon marketplace, it allows Amazon to create some competition among the sellers and offer the customers products at the lowest prices. The pricing strategy of the company has helped it attract customers from all corners of the world in very large numbers. Apart from lower pricing, the lower shipping costs of the company have also helped it attract customers. With higher customer convenience, the overall customer engagement at Amazon is also higher.
The customer base of the company has also grown with the increased use of smartphones and the internet worldwide. According to sources, more than 150 million users accessed the platform through its mobile app last year during September. Moreover, Amazon is vastly ahead of its nearest competitor in this area. Walmart’s app is another most visited retail app and it had around 76 million visitors during the same month last year. However, while the use of mobile apps has grown in recent years, the number of people accessing the site from a desktop computer is still very high since it is more convenient to check out and select products from a desktop. However, considering the level of competition in this area, it can be noted that Amazon has a very significant advantage compared to the other players. To match Amazon’s advantage even the closest competitor would have to work for years to grow its customer base internationally. Overall, its customer base is a source of competitive advantage for the brand and coupled with its technological capabilities and other factors it is a source of sustainable competitive advantage for the brand.
Human Resource Management:
Human resource management is also a core source of competitive advantage for technology companies like Amazon. It is why most technology brands focus on managing their human capital strategically so as to drive the best performance organization-wide and grow their employees’ productivity. At Amazon, which is basically a technology company, growth also comes from investing in research and development. The company employs a large number of talented computer engineers and programmers that continuously work to improve the efficiency and effectiveness of its online marketplace. According to Wikipedia, Amazon has 8,40,000 employees in 2020. While other technology brands like Apple, Google, and Microsoft also have talented programmers and engineers on board, none of them is a direct competitor of Amazon in the e-retail industry. Compared to Amazon, the other retail brands seem to be lagging in the area of HR. In this way, its human capital is also a source of competitive advantage for the business and when coupled with the other core competencies drives sustainable competitive advantage.
Marketing is a source of competitive advantage for almost all the leading brands, including technology brands and retail businesses. While the company has gained strong brand recognition and popularity, it still uses a large number of channels for marketing and promotions, including paid advertising, affiliate marketing, and other digital media like email marketing. Its platform is also a key marketing channel for the brand that has continued to drive higher customer loyalty and customer engagement. Apart from that, Amazon invests a considerable sum each year in marketing and promotions, which also drives higher sales and profits. When it comes to marketing, there are other retailers, like Walmart, that also have strong marketing capabilities. It is why overall marketing is not a sustainable source of competitive advantage for the company. Instead, it offers Amazon a temporary competitive advantage.
The retail industry is marked by intense competition and every brand invests a lot in building customer loyalty. In both the online and physical retail industry, customer loyalty is a major driver of sales and profitability and a key source of competitive advantage. As an online retail brand, Amazon enjoys strong customer loyalty driven by its competitive position, the strong image, pricing, and distribution capabilities. Amazon Prime is also a leading driver of customer loyalty for the brand. The benefits delivered by Amazon Prime which comes for a very small cost are also effective at building customer loyalty.
However, Amazon also faces intense competition from rival brands, including Walmart and other physical retailers that are also investing in building customer loyalty. Apart from rewards and loyalty programs, they use several more methods to drive customer loyalty like their pricing strategies and focus on customer experience. In this way, while Amazon has a strong competitive position, its advantage is reduced to some extent, and the company achieves a temporary competitive advantage from this core competency.