Description
In the early 1990s global communication networks and information technology (IT), especially the Internet, have lead to a deconstruction and reconfiguration of traditional value chains . In consequence, branch boundaries faded and new business models emerged.
Technische Universität Berlin
Fakultät VIII: Wirtschaft und Management
Institut für Technologie und Management
Fachgebiet Strategische Unternehmensführung
Prof. Dr. Michael Mirow
Seminar Paper on
Strategies to Achieve Market Leadership: The Example of Amazon
(Summer term 2005)
presented by:
Sören Preibusch, 215995
Kottbusser Damm 24
10967 Berlin
Matthias Fleckenstein, 215274
Magistratsweg 21
13593 Berlin
Berlin, May 17, 2005
Table of Contents I
Table of Contents
Table of Contents ............................................................................................ I
Table of Abbreviations.................................................................................... II
Table of Figures............................................................................................. III
Table of Tables..............................................................................................IV
1 Introduction.................................................................................................. 1
2 Market Leadership as a Strategic Goal in Electronic Commerce ................ 1
2.1 Value Chains and Actors in EC............................................................. 1
2.2 Principles for Success in Electronic Commerce.................................... 3
2.3 Porter’s Branch Structure Analysis applied to EC Markets ................... 4
2.4 Context Factors and Value Creation Potentials in EC Markets............. 8
2.5 First Mover Advantage and the Role of the Pioneer ............................. 9
3 Amazon.com – The Road to Market Leadership ....................................... 10
3.1 Company Portrait ................................................................................ 10
3.2 Redefining Book Retailing: Amazon vs. Barnes & Noble.................... 11
3.3 Realizing the Value Creation Potentials.............................................. 13
3.4 Exploiting First Mover Advantages...................................................... 21
4 Conclusion and Outlook ............................................................................ 22
Appendix ...................................................................................................... 23
References ................................................................................................... 31
Table of Abbreviations II
Table of Abbreviations
B Billion
DBW Die Betriebswirtschaft
EB Electronic Business
EC Electronic Commerce
EM Electronic Market
FMA First Mover Advantage
ICT Information and Communication Technologies
IT Information Technology
M Million
unpaged Document is not a paged media
ZfB Zeitschrift für Betriebswirtschaftslehre
zfbf Zeitschrift für betriebswirtschaftliche Forschung
As used herein, “Amazon.com” and similar terms include Amazon.com, Inc.
and its subsidiaries, unless the context indicates otherwise.
Table of Figures III
Table of Figures
Figure 1: Porter’s Five Forces Model (including the major determinant of
each force) ..................................................................................................... 5
Figure 2: Context Factors and Value Creation Potentials in Electronic
Commerce...................................................................................................... 8
Table of Tables IV
Table of Tables
Table 1: The transaction relationships in Electronic Commerce ................... 2
1 Introduction 1
1 Introduction
In the early 1990s global communication networks and information technol-
ogy (IT), especially the Internet, have lead to a deconstruction and reconfigu-
ration of traditional value chains
1
. In consequence, branch boundaries faded
and new business models emerged.
2
Opportunities to expand into reshaped
business segments and to develop innovative products and services in order
to attract valuable customers appeared.
3
By considering the case of Ama-
zon.com Inc., we will show how dedicated strategies helped to acquire mar-
ket leadership in these new business environments.
4
The rest of this paper is organized as follows: In section 2, we will explore
value chains and actors in EC. Principles of success are discussed, and
based on Porter’s Branch Structure Analysis, we will define strategic context
factors and carve out value creation potentials in Electronic Markets. In sec-
tion 3, we will analyze how these theoretically derived principles apply to the
case of Amazon.com.
2 Market Leadership as a Strategic Goal in Electronic Commerce
2.1 Value Chains and Actors in EC
Influenced by rapid technological progress, the terms Electronic Business
(EB) and Electronic Commerce (EC) have evolved over time to include all
aspects of “internetworked technologies”.
5
A canonical definition is still miss-
ing. Today, EC is a part of EB.
6
For this paper we will adopt Wirtz’s definition:
EB describes the “preparation as well as the partial, respective total support,
processing and maintenance of performance exchange processes via elec-
tronic networks”.
7
EC focuses on the transaction processes on the distribu-
tion side and their support. Throughout this paper, we will use the following
1
Picot, A., 1996; Zerdick, A. et al., 1999; Picot, A., Reichwald, R., Wigand, R.T., 1998, p. 19 ff.; Wei-
ber, R., McLachlan, C., 2000, p. 119
2
Schweitzer, M., 2000, p. 42; Mahadevan, B.,2000, p. 55
3
Prahalad, C.K., Hamel, G., 1990, p. 239; Bate, J.D., Johnston Jr., R.E., 2005, p. 12
4
Koob, C., 2000, p. 27 f.; Drucker, P.D., 1999
5
Ware et al., 1997, p. 29; Whinston, A.B., Stahl, D.O., Choi, S.-Y.,1997, p. 12
6
Rebstock, M., 2000, p. 7
7
Wirtz, B.W., 2000, p. 33: „Anbahnung sowie die teilweise respektive vollständige Unterstützung, Ab-
wicklung, und Aufrechterhaltung von Leistungsaustauschprozessen mittels elektronischer Netze”
2 Market Leadership as a Strategic Goal in Electronic Commerce 2
definition adapted from Rebstock, Kalakota/Whinston, and Wamser:
8
“EC is
the electronic, market-mediated buying and selling of information, products,
and services via computer networks and their support in all transaction
phases”.
The Electronic Market (EM) electronically maps information and communica-
tion processes between market players in computer networks.
9
This process
is called mediation and enables the coordination of business interactions be-
tween the players in all transaction phases;
10
information phase, negotiation
phase and execution phase, form the transaction process (see Exhibit I).
11
EMs represent a virtualization of the location where supply and demand
meet.
12
Characteristics of electronic markets are: (1) the “anytime and any-
place”-principle, i.e. the ubiquity of market access, which enables trading and
selling without spatiotemporal restrictions;
13
(2) augmented market transpar-
ency
14
which results in (3) reduced transaction costs for example through
search facilities;
15
and (4) increased speed of transaction processes.
16
DEMAND SIDE
Consumer Business Administration
C
o
n
s
u
m
e
r
Consumer-to-
Consumer
g.e. small advertisements
on the Internet
Consumer-to-
Business
g.e. job market with ads from job-
seekers
Consumer-to-
Administration
g.e. tax handling for private indi-
viduals (income tax etc.)
B
u
s
i
n
e
s
s
Business-to-
Consumer
g.e. Electronic Retailing
Business-to-
Business
g.e. company orders via EDI from
suppliers
Business-to-
Administration
g.e. tax handling
for enterprises
S
U
P
P
L
Y
S
I
D
E
A
d
m
i
n
i
s
t
r
.
Administration-to-
Consumer
g.e. handling of support services
(social welfare, unemployment aid)
Administration-to-
Business
g.e. procurement of public admini-
strations via Internet
Administration-to-
Administration
g.e. transactions between inter-
/national public administrations
Table 1: The transaction relationships in Electronic Commerce
17
8
Rebstock, M., 2000, p. 6; Kalakota, R., Whinston, A.B., 1996, p. 1; Wamser, C., 2001, p. 11
9
Bakos, Y.J., 1991a, p. 31 ff.
10
Bakos, Y.J., 1991b, p. 296
11
Reichwald, R., 1999, p. 284; Schmid, B., 1993, p. 468
12
Picot, A., Reichwald, R., Wigand, R.T., 1998, p. 318; Bakos, Y.J., 1998, p. 13 f.
13
Timmers, P., 1999, p. 11 f.; Schmid, B., 1993, p. 468
14
Wamser, C., 2000, p. 20
15
Barryman et al., 1998, p. 154 f.; Bakos, Y.J., 1997, p. 1684
16
Wamser, C., 2000, ibid.
17
Hermanns, A., Sauter, M., 1999b, p. 23
2 Market Leadership as a Strategic Goal in Electronic Commerce 3
The transactions in Electronic Markets can be classified with regard to the in-
volved actors. The market players take the role of either the customer or the
merchant during the transaction process
18
: for the demand-side as well as for
the supply side, one distinguishes Consumers (abbreviated by C), Busi-
nesses (B) and governmental agencies or Administrations (A), resulting in
the nine-field matrix presented in Table 1.
2.2 Principles for Success in Electronic Commerce
Similarly to the marketing principles identified by Bruhn
19
, Wamser empha-
sizes seven prerequisites for successful operation and goal-oriented design
in EC:
20
- Market Orientation as one of the most important characteristics of modern
management.
21
All activities should target the relevant market. The par-
ticularities of electronic markets have to be captured, arising chances and
upcoming risks must be assessed.
22
- User Orientation as the maximization of the customers’ subjectively per-
ceived utility. Instead of focusing on a technology driven approach, the
relevant market’s needs should be targeted.
23
Nonetheless, new tech-
nologies can serve as a hint how to offer substantial surplus value to cus-
tomers, for example through automated recommender systems.
24
This, in
turn can translate into a competitive advantage.
- Systematic Management Processes are required in order to cope with
concurrently upcoming business opportunities. A methodical way of pro-
ceeding, including planning, monitoring, and controlling of all EC activi-
ties, is necessary.
25
18
Merz, M., 2002, p. 22
19
Bruhn. M., 1997, p. 14 f.
20
Wamser, C., 2001, p. 30 ff.
21
Kotler, P., Bliemel, F., 1999, p. 1173; Nieschlag, R., Dichtl, E., Hörschgen, H., 1997, p. 958; Meffert,
H., 1998, p. 976 ff.
22
Wamser, C., 2001, p. 31
23
Wamser, C., Fink, D.H., 1997a, p. 47; Timmers, P., 1999, p. 24
24
Palmer, J., 2002, p. 102 f.; Schafer, J.B., Konstan, J.A., Riedl, J., 2001, p. 1; Resnick, P., Varian, H.
1997, p. 56
25
Wildemann, H., 2000, p. 22; Wamser, C., Fink, D.H., 1997, p. 48; Eggenberger, C., Klein, S., 2000,
p. 181 f.
2 Market Leadership as a Strategic Goal in Electronic Commerce 4
- Innovative Solution Concepts are required in order to cope with changing
market conditions and customer expectations, to distinguish oneself from
competitors, and to systematically source innovations.
26
- Integration of Activities on the operational and technological level is es-
sential, because isolated, group-constrained solutions cannot tap the full
synergy and performance potentials that can be achieved with integrated
solutions.
27
- Creation of Economic Values must be the guiding principle of all techno-
logical activities. Technology is not an end in itself; the profitability of each
investment has to be assessed by a cost-benefit analysis.
28
These principles determine the fundamental orientation of EC. Thus, suc-
cessful EC-Management is the systematic planning, monitoring and control-
ling of the innovative, market and utility oriented implementation of ICT; it as-
sures value orientation and goal oriented integration of all activities to form a
holistic and operational effective solution.
29
EC-Management includes a thor-
ough analysis of the branch attractiveness, and the enterprise’s competitive
strengths as presented in the next two sections.
2.3 Porter’s Branch Structure Analysis applied to EC Markets
Branch attractiveness and patterns of competition are mainly determined by
branch structures.
30
Porter distinguishes five structural features (“Five
Forces”) that act as driving forces of branch competition (see Figure 1).
Based on this analysis, the company can develop competitive strategies to
realize sustained competitive advantages. Porter explicitly mentions the
Internet as a new technology that can impact on all five forces.
31
Even though Porter argues that suppliers can have increased bargaining
power due to information asymmetries, higher specialization than the branch,
threat of forward integration, and switching costs on the buyer side, their po-
26
Wildemann, H., 2000, p. 37
27
Gascoyne, R.J., Ozcubukcu, K., 1997, p. 114; Kalakota, R., Whinston, A.B., 1996, p. 403; Sauter,
M., 1999, p.115
28
Wamser, C., Fink, D.H., 1997b, p. 218; Hermanns, A., 1999, p. 98; Picot, A., 1985, p. 383
29
Wamser, C., 2001, p. 34
30
Porter, M.E., 1980; Porter, M.E., 1985
31
Porter, M.E., 1999a, p. 12; Porter, M.E., 1999b, p. 233
2 Market Leadership as a Strategic Goal in Electronic Commerce 5
sition is weakened in context of EC.
32
Increased market transparency re-
duces buyer search and information costs in an extended procurement mar-
ket, equalizing information asymmetries.
33
Innovative trading mechanisms al-
low buyers to strengthen their bargaining position, for example by pooling
their sourcing activities or by reverse auctioning.
34
Switching costs are de-
creasing mainly due to higher market transparency and open standards in
ICT; lock-in effects caused by proprietary standards are diminishing.
35
Buyers can profit from decreased switching costs, and are better informed
on a more transparent market where competitors are “only one click away”.
36
This effect becomes stronger as the products become increasingly inter-
changeable.
37
Industry
Competitors
Intensity
of Rivalry
Buyers Suppliers
New Entrants
Substitutes
Bargaining Power
of Suppliers
Bargaining Power
of Buyers
T
h
r
e
a
t
o
f
N
e
w
E
n
t
r
a
n
t
s
T
h
r
e
a
t
o
f
S
u
b
s
t
i
t
u
t
e
s
Determinants of Buyer Power
Bargaining Leverage Price Sensitivity
? Buyer concentration vs. ? Price total purchase
firm concentration ? Product differences
? Buyer volume ? Brand identity
? Buyer switching costs ? Impact on quality /
relative to firm switching costs performance
? Ability to backward integrate ? Buyer profits
? Substitute products ? Decision makers’
? Pull-through incentives
Rivalry Determinants
? Industry growth
? Fixed (or storage) costs / value added
? Intermittent overcapacity
? Product differences
? Brand identity
? Switching costs
? Concentration and balance
? Informational complexity
? Diversity of competitors
? Corporate Stakes
? Exit barriers
Determinants of
Substitution Threat
? Relative price/ perfor-
mance of substitutes
? Switching costs
? Buyer propensity to
substitute
Determinants of Supplier Power
? Differentiation of inputs
? Switching costs of suppliers and
firms in the industry
? Presence of substitute inputs
? Supplier concentration
? Importance of volume to supplier
? Cost relative to total purchases in
the industry
? Impact of inputs on cost or
differentiation
? Threat of forward integration
relative to threat of backward
integration by firms in the industry
Entry Barriers
? Economies of scale
? Proprietary product differences
? Brand identity
? Switching costs
? Capital requirements
? Access to distribution
? Absolute cost advantages
? Proprietary learning curve
? Access to necessary inputs
? Proprietary low-cost product design
? Government policy
? Expected retaliation
Figure 1: Porter’s Five Forces Model (including the major determinant of each force)
38
32
Porter, M.E., 1999a, p. 61 ff.
33
Evans, P.B., Wurster, T.S., 1998, p. 62; Haertsch, P., 2000, p. 126 f.
34
Kaplan, S., Sawhney, M., 2000, p. 101
35
Downes, L., Mui, C., 1998, p. 126 f.; Shapiro, C., Varian, H.R., 1998, p. 126 f.
36
Clarke, K., 2001, p. 160
37
Porter, M.E., 1999a, p. 58 ff
38
Porter, M.E., 1985, p. 6
2 Market Leadership as a Strategic Goal in Electronic Commerce 6
The threat of new competitors entering the market, favoured by lower mar-
ket entry barriers, lies in an expanded supply, leading to falling prices and
shrinking margins.
39
EC enterprises face international competition from new
branches, because branch barriers dissolve under the influence of techno-
logical innovations, industries converge and national frontiers become insig-
nificant in Electronic Markets.
40
Market entry barriers are lower as the distri-
bution channels are unlimited; asset bindings and initial investment costs are
reduced.
41
In retailing, optimized transaction processes and powerful logistics
systems allow to operate merely without stocks, as customers orders are di-
rectly forwarded to suppliers.
42
However, new technologies can be used to build new market entry barriers:
first, differentiation allows creating customer loyalty; second, especially the
pioneer can attract a critical mass, which stimulates demand through a multi-
plication effect.
43
This particularly holds under the influence of network ef-
fects.
44
The knowledge of preferences and buying patterns of the target
groups is crucial, as it represents a prerequisite for individualized customer
offerings as a base for customer loyalty.
45
These strategies lie beyond the
traditional entry barriers discussed in industrial organization theory.
46
In principle, all companies in one branch compete with those in other
branches that offer potential substitutes whose price-performance ratios de-
termine the level of competition.
47
EC has lead to disintermediation and rein-
termediation, where traditional intermediaries disappear and new ones de-
velop, especially at the so called “point of frictions” in the value chains.
48
In
the case of electronic retailing, specialized EC companies have a competitive
advantage over less experienced traditional retailers expanding into EC;
49
technological innovations lead to increased substitution pressure towards
former technologies.
50
39
Porter, M.E., 1999a, p. 37 ff
40
Schad, H., 2000, p. 112; Prahalad, C.H., Hamel, G., 1994, p. 10
41
Hoffman, D.L., Novak. T.P., 1997, p. 50
42
Wamser, C., 2001, p. 53
43
Link, J., 2000, p. 12
44
Clement, M., Litfin, T., Peters, K., 1999, p. 83; Schoder, D., 1995, p. 18 f.
45
Haertsch, P., 2000, p. 125; See also section 3.3
46
Christensen, C.M., 1997, p. 210
47
Porter, M.E., 1999a, p. 56 ff.
48
Schad, H., 2000, p. 102
49
Albers, S., Peters, K., 2000, p. 188 ff.; Albers, S., Peters, K., 1997, p. 71
50
Bettis, R.A., Hitt, M.A., 1995, p. 13
2 Market Leadership as a Strategic Goal in Electronic Commerce 7
Rivalry among competitors increases in EC due to higher market transpar-
ency, decreasing switching costs, and innovative trading mechanisms; low-
ered market entry barriers give the customers higher bargaining power and
attract new competitors.
51
In stagnating markets rivalry among competitors is
evident;
52
but also in the rapidly growing EC market, competition is high as
many small and flexible firms penetrate the market with low costs.
53
The
phenomenon “Co-opetition”, describing a simultaneously competitive and co-
operative relationship among the market players,
54
does not reduce the level
of competition.
55
One cannot deny that Porter’s Branch Structure Analysis had a lasting impact
on both theory and practice of strategic planning. However, literature argues
that Porter’s Structure Analysis has only reduced explanatory potential in the
context of high branch dynamics:
56
“The structural analysis of industries, in-
stead of being a specialized planning tool for forecasting evolution over con-
siderable periods, becomes, instead, useful as a capability to quickly under-
stand the continuously evolving nature of the industry.”
57
Some authors have
proposed extensions to Porter’s model. Downes and Mui introduce three ad-
ditional competitive forces: digitization, globalization, and deregulation.
58
Haertsch adds a group of “complementers” (i.e. enterprises supplying com-
plementary goods) to form the sixth competitive force of the “Digital Econ-
omy”.
59
In order to cope with the challenges arising from the dynamics in EC, com-
panies must develop and deploy adequate competitive strategies, combining
differentiation (or preference) and cost-leadership strategies to implement
outpacing strategies.
51
Becker, J., 1998, p. 371; Hermanns, A., Sauter, M., 1999a, p. 5
52
Neumann, J., Morgenstern, O., 1961
53
Schad, H., 2000, p. 113
54
Brandenburger, A.M., Nalebuff, B.J., 1996, p. 18; Preiss, K., Goldman, S.L., Nagel, R.N., 1996
55
Wamser, C., 2001, p. 59
56
De Kare-Silver, M., 1998, p. 46; Feuer, R., Chaharbaghi, K., 1995, p. 20; Moore, J., 1996, p. 142
57
Bettis, R.A., Hitt, M.A., 1995, p. 12 f.
58
Downes, L., Mui, C., 1998, p. 64 ff.
59
Haertsch, P., 2000, p. 131 f.; Wildemann, H., 2000, p. 33
2 Market Leadership as a Strategic Goal in Electronic Commerce 8
2.4 Context Factors and Value Creation Potentials in EC Markets
The tapping of the economic potentials is influenced by exogenous competiti-
ve context factors. Link and Hildebrand
60
have developed a generic assess-
ment framework for economic trends that can be applied to EC (Figure 2).
61
Context Factors Value Creation Potentials
Diversity Individualization Potential
Variability Swiftness Potential
Complexity Innovation Potential
Price Sensitivity Cost Leadership Potential
Reputation Potential Intensity of Competition
Figure 2: Context Factors and Value Creation Potentials in Electronic Commerce
62
Diversity describes the heterogeneousness of the company’s environment,
especially with regard to actual and potential customer needs and prefer-
ences. Variability describes the swiftness and frequency of changes of the
company’s relevant environments.
63
Complexity describes the versatility of
changes and their interdependencies on multiple layers.
64
Price sensitivity
describes the price’s impact on the customer’s purchasing behaviour. Inten-
sity of competition describes the degree of rivalry among competitors in a
given branch. This conceptual framework has been empirically verified.
65
All competitive strategies aiming at realizing a sustained Comparative Com-
petitive Advantage
66
, pivot around five interdependent potentials, corre-
sponding to the five context factors: (1) the individualization potential derives
from the user’s information and guidance needs in the context of complex
decision finding processes;
67
the tailor-made, personalized satisfaction of
customer desires (also called “One-to-One Marketing”) requires continuous
60
Link, J., Hildebrand, V., 1993, p. 12 ff.
61
Wamser, C., 2001, p. 72
62
Wamser, C., 2001, p. 72
63
Laux, H., Liermann, F., 1997, p. 248 ff.
64
Bleicher, K., 2004, p. 13
65
Ho, J., 1997, unpaged; Reichheld, F.F., Schefter, P., 2000, p. 107
66
Backhaus, K., 2003, 9 ff.
67
Link, J., Tiedtke, D., 2000, p. 110
2 Market Leadership as a Strategic Goal in Electronic Commerce 9
customer contact and efficient data mining techniques.
68
Companies seek to
establish learning relationships with their customers;
69
(2) the swiftness po-
tential in time competition allows companies to realize “economies of
speed”,
70
whose components are pioneer advantages, and immediate, rapid
customer satisfaction.
71
Weiber and Kollmann identify a “Spead-Leader-
Strategy” aiming at realizing a time lead compared to competitors.
72
On the
operational level, the swiftness potential lies in the acceleration of transaction
processes through efficient, integrated operations and fulfilment systems;
73
(3) the innovation potential is an independent dimension in competition, veri-
fied empirically, and finds expression in technological and market leader-
ship.
74
Innovations are especially important when other differentiation poten-
tials are exhausted and competition is intense. However, a lasting compara-
tive innovative advantage is difficult to achieve, due to reduced imitation pro-
tection on the highly transparent electronic markets;
75
(4) the reputation po-
tential can only be established in the long run, as the company has to prove
itself as trustworthy.
76
Particularly in the non-tangible EC, transactions have a
high share of experience and trust characteristics.
77
The customer prefers
buying at the company she trusts more;
78
(5) the cost leadership potential
complements the other four differentiation potentials. However, cost leader-
ship is hard to achieve and to defend in EC.
79
2.5 First Mover Advantage and the Role of the Pioneer
First Mover Advantages (FMAs) are no automatism
80
; they must be mined on
the supply and demand side.
81
On the supply side, (1) innovations, protected
by patents and copyrights,
82
enable FMAs through a temporary monopoly;
(2) economies of scale allow limit pricing strategies, which set market entry
68
Meyer, A., Pfeiffer, M., 2000, p. 293
69
Meyer, A., Davidson, J.H., 2001, p. 58; Charlet, J.-C., 1998, p. 1 ff.
70
Simon, H., 1989, p. 27, 79 f., 83; Backhaus, K., 2003, p. 16 ff.
71
Meffert, H., 1998, p. 264
72
Weiber, R., Kollmann, T., 2000, p. 58
73
Simon, H., 1989, p. 81
74
Albach, H., 1989, p. 1339
75
Wildemann, H., 2000, p. 57
76
Domizlaff, H., 1982, p. 89; Schade, C., Schott, E., 1993, p. 501
77
Shapiro, C., Varian, H.R., 1998, p. 5 f.
78
Kaas, K.P., 1990, p. 545 f.; Kaas, K.P., 1992, p. 897
79
Haertsch, P., 2000, p. 134
80
Kerin, R.A., Varadarajan, R., Peterson, R.A., 1992, p. 42
81
Golder, P.N., Tellis, G.J., 1993, p. 159 f.; Vidal, M., 1995, p. 45 ff.
82
Lieberman, M.B., Montgomery, D.B., 1988, p. 43
3 Amazon.com – The Road to Market Leadership 10
barriers as followers would have to operate with negative margins;
83
(3) the
pioneer has a more advanced position on the experience curve, allowing
lower average costs;
84
(4) pioneers can closely tie in partners into collabora-
tion networks, making it harder for followers to integrate their value chains.
85
On the demand side, (5) product differentiation creates FMAs as the pioneer
occupies niches that thus cannot be exploited by followers;
86
(6) pioneers
can use the period before followers enter the market to achieve a “critical
mass” and to set a standard which are stabilized by network effects;
87
(7)
switching costs and lock-in effects lead to forced customer loyalty, even if the
follower has an objectively superior selling proposition;
88
(8) the pioneer can
shape user preferences by influencing cognitive and emotional product per-
ception and establish its offer as a reference by which followers will be
judged;
89
(9) the pioneer can establish a strong reputation of trustworthiness,
reliability and quality leadership.
90
Literature states that demand side effects
have much higher FMA potential in the context of EC.
91
3 Amazon.com – The Road to Market Leadership
3.1 Company Portrait
Amazon.com Inc., a Fortune 500 company, incorporated in 1994 / Washing-
ton and reincorporated in 1996 / Delaware, went online on the WWW in July
1995. Since its IPO in May 1997, Amazon is listed on the Nasdaq National
Market. Amazon and its affiliates operate seven retail websites: amazon.com
/ .co.uk / .de / .co.jp / .fr / .ca, and joyo.com; a9.com and alexa.com, also op-
erated by Amazon since 2004, enable search and navigation, imdb.com, is a
movie database.
92
The company’s stated strategy is to “focus on customer
83
Lambkin, M., 1992, p. 6
84
Henderson, B.D., 1974, p. 14 ff.; Vidal, M., 1995, p. 47
85
Gemünden, H.G., 2003, p. 16
86
Meyer, A., 1996, p. 66
87
Mueller, D.C., 1997, p. 832: “the potential demand for a second mover’s product […] far below that of
that of the first mover.”
88
Lieberman, M.B., Montgomery, D.B., 1988, p. 46
89
Carpenter, G.S., Nakamoto, K., 1989, p. 286 ff.; Alpert, F.H., Kamins. M.A., 1995, p. 34
90
Spremann, K., 1988, p. 618 ff
91
Meyer, A., Specht, M., 2002, p. 263 f.
92
Amazon.com, Inc., 2005a, p. 55; Amazon.com, Inc., 2004a, unpaged; Amazon.com, Inc., 2004b, un-
paged
3 Amazon.com – The Road to Market Leadership 11
experience by offering [their] customers low prices, convenience, and a wide
selection of merchandise.”
93
Started as a pure online book retailer,
94
Amazon.com began expanding its
product and service offering.
95
New business models were introduced in
1999,
96
web hosting and fulfilment service partnerships with traditional retail-
ers and consumer portals followed in 2000.
97
Despite rapid growth of revenues (up from 15.7M US$ in 1996 to 6.9B US$
at the end of 2004)
98
, Amazon generated operating losses (1.4B US$ net in
2000) and only reached profitability in 2003.
99
Since 2000, Amazon is the
largest Internet retailer,
100
reporting a customer base of more than 27M ac-
tive accounts by 2002/II (up from 0.34M in 1997/I).
101
3.2 Redefining Book Retailing: Amazon vs. Barnes & Noble
When Amazon went online, the book industry was highly fragmented with the
largest retailer Barnes & Noble (B&N) only representing 11% of total book
sales in the US.
102
B&N operated its stores as superstores (covering 6000m
2
and stocking up to 175.000 titles)
103
and mall-based stores (smaller in size
and selection), but also offered mail-ordering through catalogue services
104
.
B&N had a centralized logistics and distribution centre and could thus lever-
age scale economies in procurement by sourcing books directly from pub-
lishers, obtaining higher discounts than other book retailers, and avoiding
high mark-ups from wholesalers. Due to centralized stock, books could be
shipped to the points of sale within a few days, avoiding delivery delays from
publishers.
105
B&N installed an electronic store (management) system, ena-
bling real time information exchange among its stores, the distribution centre
93
Amazon.com, Inc., 2005a, p. 3
94
Leschly, S., Roberts, M.J., Sahlman, W.A., 2003, p. 1
95
See section 3.3
96
Hilliard, U., Horovitz, J., Kumar., N., 2000, p. 8
97
Applegate, L.M., 2002b, p. 1
98
Amazon.com, Inc., 2001, p. 19
99
Amazon.com, Inc., 2005a, p. 25
100
Hilliard, U., Horovitz, J., Kumar., N., 2000, p. 1
101
Applegate, L.M., 2002b, p. 7; Sahlman, W.A., Katz, L.E., 1999, p. 3
102
Sahlman, W.A., Katz, L.E., 1999, p. 4
103
Hilliard, U., Horovitz, J., Kumar., N., 2000, p. 2; Barnes & Noble, Inc., 1998, p. 13
104
Ghemawat, P., Baird, B., 2004, p. 5
105
Ghemawat, P., Baird, B., 2004, p. 5
3 Amazon.com – The Road to Market Leadership 12
and wholesalers with access to a 2.5M title database, though not accessible
for customers.
106
Amazon redefined traditional book retailing through a radically different ap-
proach: online, over the Internet.
107
Traditional book retailing has several
drawbacks. The selection of titles is physically limited by available store
space. Traditional retailers must invest in inventory, real estate and qualified
personnel for each retail location and it is impossible to provide “a custom-
ized store for every customer or to provide customized recommendations
without significantly increasing selling costs.”
108
Internet retailers have the
advantages of centralized inventory management and low occupancy costs.
A large and global group of customers can be reached from a single central
location, making the business model very scalable. It is possible to track con-
sumer purchasing patterns in order to better anticipate demand and to pro-
vide personalized services such as customized store fronts.
109
Amazon offered more than 1M titles in its database, but only carried 2000 of
them in its own warehouse. In contrast to B&N, Amazon sourced its books
mainly from wholesalers, because Amazon could not stock large shipments
from publishers and because deliveries from publishers took weeks to ar-
rive.
110
Book wholesalers, in contrast, could ship most orders within a couple
of days. Compared to B&N’s centralized stock strategy, Amazon’s just-in-
time procurement multiplied inventory turns and reduced working capital (see
Exhibit II),
111
but shrunk gross margins.
Amazon had the advantage of a negative operating cycle: credit card pay-
ments were received within a few days of purchase, but vendors were not
paid for up to 44 days of sale. In addition, Amazon did not actually carry in
inventory many of the products it sold, relying instead on suppliers to provide
fast fulfilment and shifting inventory risks to its vendors. Amazon’s typical op-
erating cycle was around -21 days, whereas the typical book retailing operat-
ing cycle was around +78 days.
112
Thus Amazon generated interest on the
106
Ghemawat, P., Baird, B., 2004, p. 7
107
Ghemawat, P., Baird, B., 2004, p. 8; Hof, R.D., 2004, p. 1
108
Covey, J., 1997, unpaged
109
Covey, J., 1997, unpaged
110
Ghemawat, P., Baird, B., 2004, p. 9
111
Gurley, W.J., 1997, p. 1
112
Burgelman, R.A., Meza, P., 2001, p. 4; Szkutak, T., 2004, p. 15; Mui, C., 2004, p. 3
3 Amazon.com – The Road to Market Leadership 13
full sale price (cost of goods and gross margin) for over a month (see Exhibit
III).
113
Amazon’s business model combined informational elements (virtual store-
front) with physical elements (operations). While Amazon highly invested in
information technology, with a strong focus on software rather than hardware,
its operations were practically limited to packing and shipping at that time.
114
Amazon’s core value propositions for customers buying books over the Inter-
net were convenience, selection, price, and customer service. Its web store
was online 24-7 and offered supplementary services, such as book recom-
mendations and reviews. Amazon had a database with 1.1M books, com-
pared to 175.000 books on site in the largest superstores.
115
Customers
could use the database search functionality to find even rare and out-of-print
titles filtered by different search criteria. Amazon also sought to price com-
petitively by offering discounts equivalent to those offered by large book
chains (see Exhibit IV).
116
Ease of shopping was provided through a simple
checkout procedure.
B&N did not launch its own online business until 1997. By that time, Amazon
had a strong leadership position in online book retailing, controlling over 75%
of all online book sales.
117
Sales had increased by 838% from 15.7M US$ in
1996 to 147.8M US$ in 1997 and cumulative customer accounts had grown
by 738% from 0.18M to 1.5M during the same period.
118
In the following sections we will analyze how Amazon realized the Value
Creation Potentials and the First Mover Advantages – as depicted in sections
2.4 and 2.5 – since 1997.
3.3 Realizing the Value Creation Potentials
Amazon claims to be “the Earth’s most customer centric company. It means
three things: listen, invent and personalize”.
119
In order to tap the Individu-
alization Potential, Amazon’s key value propositions to customers, besides
easy-to-use browsing and searching functionalities, include reviews and con-
113
Sahlman, W.A., Katz, L.E., 1999, p. 22
114
Applegate, L.M., 2002a, p. 4
115
Hilliard, U., Horovitz, J., Kumar., N., 2000, p. 2; Ghemawat, P., Baird, B., 2004, p. 9
116
Barry, D. et al., 1997, p. 1
117
Turban, E. et al., 2000, p. 430
118
Amazon.com, Inc., 1997, p.3
119
Bezos, J.P., 2000b, unpaged
3 Amazon.com – The Road to Market Leadership 14
tent services, an online community, recommendations and personalization
features. Latter comprise greeting customers by name, instant and personal-
ized recommendations and individual notification services.
120
Amazon pro-
vides content services, synopses, annotations, product reviews and ratings
by customers and (external) editorial staff, and interviews with authors and
artists; customers can order and select gifts from the gift centre where they
find recommendations from Amazon’s editors.
121
In late 1999, Amazon im-
plemented its “Wish List” feature, allowing customers to create an online wish
list of desired products that others could reference for gift-giving purposes.
122
Since the beginning, Amazon’s website included standard-setting functional-
ities such as customer accounts including multiple shipping and invoice ad-
dresses, diverse payment options, auto-login features and product prefer-
ences based on which Amazon delivers thematically matching newsletters.
Users are provided shopping carts, and can merge and split orders not yet
shipped; past orders are collected in an order history. Stock availability is dis-
played online for each product, and not yet released items can be pre-
ordered to be automatically shipped upon availability: Amazon puts “each
customer at the centre of her own universe”.
123
The CEO Jeffrey P. Bezos summarized Amazon’s personalization efforts by
stating: “If we have seventeen million customers, we should have seventeen
million stores.”
124
Tapping the individualization potential also implies carrying out a differentia-
tion strategy. As theoretically anchored in Ansoff’s Strategy Matrix, differen-
tiation is the expansion into new markets with new products (see Exhibit
V).
125
Since 1998, Amazon went global, successively opening the web de-
pendencies amazon.co.uk and amazon.de, through acquisitions in the local
markets. They reached market leadership in the new segments in the same
year and served over 17 million customers in over 150 countries in 1999.
126
Until 2005, the Japanese, Canadian and French web sites were launched.
127
120
Amazon.com, Inc., 2001, p. 3
121
Amazon.com, Inc., 1997, p. 3
122
Amazon.com, Inc., 2000a, p. 4
123
Bezos, J.P., 2000b, unpaged
124
Bezos, J.P., 2000b, unpaged
125
Ansoff, A.I., Stewart, J.M., 1967, p. 81
126
Amazon.com, Inc., 2000a, p. 1
127
Amazon.com, Inc., 2005a, p. 3
3 Amazon.com – The Road to Market Leadership 15
In an empirical study evaluating expected and perceived service quality from
EC retailers, comparing B&N, Amazon and Bookstore.About.com, Amazon
received best average rankings in 20 out of 22 questions, including the as-
pects Tangibles, Reliability, Responsiveness, Assurance and Empathy.
128
In 1999, Amazon extended its logistics and fulfilment infrastructure by build-
ing automated fulfilment centres, customer service centres, and warehouses
that were interfaced with Amazon’s EC platform, enabling fast response and
delivery times, in order to tap the Swiftness Potential.
129
Orders that could
not be filled from the company’s inventory were automatically forwarded to
Amazon’s suppliers. Due to arrangements with distributors, products could
be shipped to Amazon’s distribution centres within hours.
130
In addition,
Amazon established agreements with outsourcing partners, such as Federal
Express, to help manage its logistics and shipping operations.
131
Due to its
new fulfilment and customer service infrastructure, Amazon was able to cope
with an increasing number of customer orders: “In early December 1999, the
company logged peak shipping of roughly 16M US$ of products in one day,
which was more than the company’s total sales in 1996. […] During the 2000
holiday season, Amazon shipped more than 31M items with over 99% accu-
racy.”
132
The availability of company-owned distribution centres, built to 70-
80% overcapacity,
133
enabled Amazon to begin sourcing books directly from
publishers, resulting in higher margins by avoiding mark-ups from wholesal-
ers.
134
Amazon avoided time-consuming media clashes,
135
by cross-functionally in-
tegrating web site, consumer service units, payment processing and ware-
house operations systems, resulting in a fully integrated EC platform.
136
Attracted by Amazon’s success, new competitors entered the Internet retail-
ing market. EC retailing became intensely competitive and Amazon faced
numerous strong competitors,
137
among them were online vendors as direct
128
Sullivan, J.R., Walstrom, K.A., 2001, p. 13
129
Leschly, S., Roberts, M.J., Sahlman, W.A., 2003, p. 4 f.; Mahadevan, B., 2000, p. 65
130
Amazon.com, Inc., 2000a, p. 6
131
Amazon.com, Inc., 2001, p. 2
132
Applegate, L.M., 2002a, p. 9 f.; Amazon.com, Inc. 2000b, unpaged
133
Rowen, M., Prudential Securities, 1999, p. 3; Applegate, L.M., Collura, M., 2000, p. 12
134
Applegate, L.M., 2002a, p. 10; Mahadevan, B., 2000, p. 63
135
Wamser, C., 2001, p. 80
136
Leschly, S., Roberts, M.J., Sahlman, W.A., 2003, p. 5
137
Amazon.com, Inc., 2000a, p. 7
3 Amazon.com – The Road to Market Leadership 16
competitors, and online auction services, Web portals, Web search engines,
online retailers using alternative distribution capabilities, publishers, distribu-
tors, manufacturers and physical-world retailers as indirect competitors.
138
Retailers specialized on a limited product range (so called “Category Killers”),
such as “Best Buy” or “Home Depot”, occupied high-margin niches.
139
Under these conditions, Amazon.com had to exploit its Innovation Potential
in order to hold its strategic position.
140
Since its beginning Amazon has been
an innovating company: its ordering system provided a fast checkout proce-
dure, storing customer information for future purchases and offering secure
credit card transactions.
141
Customers could check their order status online,
and were provided email and telephone support 24-7 via support centres.
142
By 1998, Amazon had developed EC innovations such as shopping carts, 1-
Click
®
-Ordering, personalized storefronts, and customer-friendly search and
browse features. Amazon implemented customer interface and channel inno-
vations:
143
The 1-Click-Technology allows customers to place an order by
clicking a single button without having to fill out an order form. Customer
shipping and billing information is automatically referenced.
144
Three quarters
of customers (73%) find it helpful and convenient when a web site remem-
bers basic information about them, such as names and addresses.
145
In
March 1999, Amazon introduced its auction service, which, in contrast to
eBay’s auction service, guaranteed buyers financial protection from fraud and
also provided access to Amazon’s customer service.
146
Later in 1999, Ama-
zon offered small and medium sized businesses (SMEs) the opportunity to
operate individual storefronts using Amazon’s EC platform by means of
“zShops”.
147
Also that year, Amazon started to provide web hosting and ful-
filment services to other online and offline retailers through its “Amazon
Commerce Network” (ACN), charging placement and referral fees.
148
An ex-
138
Amazon.com, Inc., 2000a, p. 9 f.; Applegate, L.M., Collura, M., 2000, p. 7
139
Applegate, L.M., 2002a, p. 11
140
Schewe, G., 1992, p. 968
141
Burgelman, R.A., Meza, P., 2001, p. 10; Louie, D.L., Rayport, J.F., 1998, p. 9
142
Hilliard, U., Horovitz, J., Kumar., N., 2000, p. 4 ff.
143
Campbell, M., Collins, A., 2001, p. 30
144
Amazon.com, Inc., 2000a, p. 4
145
Personalization Consortium, 2000, p. 2
146
Leschly, S., Roberts, M.J., Sahlman, W.A., 2003, p. 5; eBay Inc., 2005, unpaged
147
Amazon.com, Inc., 2000c, p. 1
148
Amazon.com, Inc., 2000a, p. 1
3 Amazon.com – The Road to Market Leadership 17
ample is the partnership with Toys'R'us: under a ten-year deal, Amazon
agreed to house Toys'R'us’ inventory, ship goods to consumers, process
payments, and perform post-sale customer service.
149
Amazon had to redefine its definition of “customer” through its new service
offerings.
150
At first, customers were defined as “buyers”, but since the intro-
duction of its marketplace initiative, third party sellers were equally important
customers. This change of perspective is reflected in Amazon’s “single store
strategy”.
151
Under this concept, Amazon presents its own merchandise
alongside its partner merchants’ offerings on the same product detail page
abolishing the previously existing store frontiers.
152
Amazon shifted its busi-
ness scope to be an “e-commerce platform”
153
, fulfilling B2C and hosting
C2C and B2B transactions.
In October 1999, Amazon launched its “Amazon.com Anywhere” service
which allowed customers to access the website from hand-held wireless de-
vices, such as cell phones and PDAs.
154
In November 2000, Amazon entered digital distribution. Amazon’s e-book
store offered best sellers and traditional works as well as e-audiobook titles,
including digital exclusives that were not available in conventional cassette
tape or CD formats.
155
Convenience-features like “Instant Order Update”
(which notifies customers if they are about to order the same item twice) and
“Look Inside the Book” (enabling customers to see front and back covers of
books, tables of contents and samples of inside pages) were other examples
of how Amazon translated technological innovations into surplus value to
customers. This feature was available on over 0.2M titles in 2001, exceeding
the number of titles available in the largest (offline) book superstores.
156
In 2004, Amazon launched its own search engine A9.com, which merges
several information sources, including Web and image search by Google,
reference information (encyclopaedia and dictionary) through GuruNet.com,
book text search through “Search Inside the Book” from Amazon, and movie
149
Leschly, S., Roberts, M.J., Sahlman, W.A., 2003, p. 6
150
„Customer Capitalism“, p. 383 f.
151
Leschly, S., Roberts, M.J., Sahlman, W.A., 2003, p. 7
152
Amazon.com, Inc., 2002, p. 2
153
Bezos, J.P., 2000a, p. 2
154
Amazon.com, Inc., 2000a, p. 4; Amazon.com, Inc., 2000c, p. 1
155
Applegate, L.M., 2002b, p. 4
156
Amazon.com, Inc., 2001, p. 3
3 Amazon.com – The Road to Market Leadership 18
information plus web site meta-data through its wholly owned subsidiaries
Alexa Web Search and the Internet Movie Database (imdb.com).
157
A9.com
is a highly personalized search engine, permanently remembering the user’s
search history, bookmarks, front-end configurations and clickstream. This
data is stored for future visits, and used for customized recommendations by
Amazon.com at each customer login.
158
This web search initiatives have stra-
tegic significance, since buyers conduct many product related searches prior
to a purchase, and the majority of pre-purchase search activity involves ge-
neric terms.
159
Besides implementing technical innovations, the company also has to tap its
Reputation Potential in order to generate customer loyalty.
160
As switching
costs and lock-in effects are usually low in EC, the risk of loosing the cus-
tomer is high: 28% of consumers who suffered a failed purchase attempt
stopped shopping and 23% stopped purchasing at the site in question.
161
Lit-
erature and practice have identified vendor trust as a crucial factor for EC
success.
162
Customer loyalty is a strategic goal since it directly translates into
higher revenues, higher margins, and into long-term profitability.
163
This es-
pecially applies to Amazon, which has nurtured loyalty in its customer bases
through continuous innovation in service offerings.
164
Customer loyalty is
measured by the willingness to purchase more, to recommend the vendor,
and by the trust in the vendor.
165
Online retailers usually face lower loyalty
compared to their offline counterparts: first, EC’s technological base, espe-
cially public networks are generally considered as insecure and untrust-
worthy;
166
second, the electronic retailing communication channel provides
less opportunities for confidence-building than face-to-face interactions.
167
157
Hof, R.D. (2004, p. 52; Amazon.com, Inc., 2004a, unpaged
158
A9.com, Inc., 2004, unpaged
159
DoubleClick Inc., 2005, p. 2
160
Pandya, A.M., Dholakia, N., 2005, p. 78
161
Pecaut, D.K., Silverstein, M.J., Stanger, P., Boston Consulting Group (BCG), 2000, p. 22
162
Torkzadeh, R., Dhillon, G., 2002, p. 201; Quelch, J.A., Klein, L.R., 1996, p. 70; Urban, G.L., Sultan,
F., Qualls, G.J., 2000, p. 40
163
Thompson, M., 1999, p. 1; Cooperstein, D. et al. (1999), p. 5 ff.
164
Reichheld, F.F., Markey Jr., R.G., Hopton, C., 2000, p. 178
165
Merz, M., 2002, p. 443 f.
166
Frost, F., 1999, p. 108
167
Sydow, J., 2000, p. 266
3 Amazon.com – The Road to Market Leadership 19
Nonetheless, Amazon reached the highest loyalty values, both in the online
book selling and retailing segments.
168
Research found, that perceived size and perceived reputation of an Internet
store increase customer trust in this store, leading to a more favourable atti-
tude towards that merchant, to reduced risk perceptions, and finally to an in-
creased willingness to buy.
169
In the case of Amazon, especially the per-
ceived size (as for example emphasized by claims like “Earth’s biggest selec-
tion”
170
) and the trustworthiness are positively correlated with reputation.
171
Chen and Dhillon show that the three factors competence, integrity and be-
nevolence build the multi-dimensional construct of trust.
172
They are posi-
tively influenced by company characteristics such as the reputation, brand
recognition and offline presence of the Internet vendor and the number of
years it has been in business. Website characteristics such as likeability,
functionality, usability, efficiency, reliability, portability, integrity, privacy and
security, as well as interaction characteristics such as service quality, cus-
tomer satisfaction, length of relationship, and marketing activities also impact
on the consumer’s perception of competence, integrity and benevolence.
173
Amazon strives to strengthen and broaden its brand name.
174
Opinion Re-
search found that 60% of U.S. adults were aware of the Amazon brand,
which ranked as the highest awareness of any EC brand name.
175
Similarly,
a study by Interbrand posted Amazon as the 57
th
most valuable brand – be-
tween Pampers and Hilton.
176
The functionalities implemented on Amazon’s
website – as depicted in the context of the individualization and innovation
potential – and the way they were made available to customers, raised Ama-
zon’s design principles to a reference for the whole EC retailing market.
177
Amazon was recognized as “best-in-class” by several sources.
178
It was
ranked among the best in overall performance, in quality based on interface,
168
Jarvenpaa, S.L., Tractinsky, N., Vitale, M., 2000, p. 57; GfK, 2001, p. 1
169
Jarvenpaa, S.L., Tractinsky, N., Vitale, M., 2000, p. 59 f.
170
Amazon.com, Inc., 2005b, unpaged
171
Jarvenpaa, S.L., Tractinsky, N., Vitale, M., 2000, p. 56 f.
172
Chen, S.C., Dhillon, G.S., 2003, p. 305
173
Chen, S.C., Dhillon, G.S., 2003, p. 306, 310, 312
174
Amazon.com, Inc., 2005a, p. 5; Anonymous, 1999, p. 5
175
Clarke, K., 2001, p. 164
176
Ries, D., Truong, V., Unterberg, T., 1999, p. 4; Rowley, J., 2004, p. 133
177
Weiss, L.M., Capozzi, M.M., Prusak, L., 2004, p. 84; Constantinides, E., 2004 , p. 92
178
Amazon.com, Inc., 1999b, p. 1
3 Amazon.com – The Road to Market Leadership 20
customer service, convenience, and content.
179
As the pioneer in EC retail-
ing, Amazon used its potential to set up lasting customer relationships; based
on a rating among online retailers, Amazon reached the number one overall
customer satisfaction rating.
180
When Amazon expanded its product range,
181
it used the reputation transfer
method by which companies strive to transfer previously acquired reputation
from one branch to another.
182
Moreover, Amazon provides structures to third-parties in the field of auctions
and zShops that engender institution-based trust:
183
By means of institutional
mechanisms such as feedback features, escrow services, and credit card
guarantees, Amazon achieved to build a trustworthy marketplace and to en-
courage online transactions.
184
The customer’s comfort level in providing personal data increases with the
level of perceived vendor reputation.
185
Amazon’s service offerings such as
automated recommendations require a large data base,
186
and thus rely on
an outstanding reputation. The strategic potential of a gained reputation lead
is amplified, if it can be defended and sustained over a customer’s experi-
ence chain.
187
The strategic challenge for companies in EC markets is to differentiate them-
selves in the service dimension (as shown in the context of the individualiza-
tion, swiftness, innovation and reputation potentials) and in the price dimen-
sion.
188
To realize a Cost Leadership Potential in EC is hard since web-
based intermediaries make it easier to search for the lowest price by price
comparison features.
189
Amazon endeavours to offer its customers “the low-
est possible prices”
190
, as they consider low prices as a strategic factor for
future success.
191
Amazon’s pricing strategy also includes free shipping of-
179
Applegate, L.M., Collura, M., 2000, p. 14
180
Applegate, L.M., Collura, M., 2000, p. 15; Boyd, A., 2002, p. 177; Kotha, S., Rajgopal, S.,
Venkatachalam, M., 2004, p. 130
181
Amazon.com, Inc., 2005a, p. 4
182
Schade, C., Schott, E., 1993, p. 501; Simon, H., 1985, p. 19 ff.; Filson, D., 2004, p. 152
183
Malaga, R.A., 2001, S 410
184
Pavlou, P.A., Gefen, D., 2004, p. 38; Resnick, P. et al., 2000, p. 46
185
Wamser, C., 2001, p. 87
186
Weigend, A.S., 2003, p. 15
187
Simon, H., 1989, p. 89 f.; Kaas, K.P., 1990, p. 546
188
de Figueiredo, J.M., 2000, p. 45
189
de Figueiredo, J.M., 2000, p. 46
190
Amazon.com, Inc., 2005a, p. 55
191
Amazon.com, Inc., 2005a, p. 36; Merrilees, B., 2001, p. 185
3 Amazon.com – The Road to Market Leadership 21
fers, and since 2005, members of the “Amazon Prime” program can benefit
from free two-day shipping and discounted overnight shipping.
192
3.4 Exploiting First Mover Advantages
Due to their time advantage, pioneers in EC can realize significant FMAs by
setting standards, and protecting innovations by patents and copyrights.
193
Amazon has pioneered proprietary technologies for its web site manage-
ment, search, customer interaction, recommendation, transaction processing
and fulfilment services and systems.
194
Amazon patented its 1-Click
®
tech-
nology, as well as its Bid-Click
®
auction bidding process,
195
and in 2000 was
also granted a patent on its Amazon Associates Program and on its book
recommendation service BookMatcher, which generates automatic recom-
mendations based on customer purchases.
196
Amazon licenses components
of its EC platform to third party sellers and hosts third-party sellers’ websites
providing its shopping technology.
197
Amazon realized a FMA with the concept of syndicated selling through its
Associates and Syndicated Stores programs.
198
The members of the Associ-
ates Network, including Internet companies such as AOL.com, Yahoo, Net-
scape, Excite and the AltaVista Search Service, recommend Amazon prod-
ucts to their own visitors and earn a referral fee and a commission in case of
completed purchases.
199
Amazon participates in cooperative advertising ar-
rangements with some of its vendors, and with other third parties.
200
As shown in section 3.3, Amazon realized all demand-side FMAs depicted in
section 2.5 (numbers (6) to (10)), by tapping its various Value Creation Po-
tentials. However, Amazon has not yet succeeded in the most difficult matter
of course in strategic planning: its Operating Efficiency is still low, overca-
pacities in operations and fulfilment overshadow its business perspectives,
and losses accumulated over years are a burden for the future.
192
Amazon.com, Inc., 2005a, p. 35
193
Goolsbee, A., 1999, p.14; Golden, W., Hughes, M., Gallagher, P., 2003, p. 39
194
Amazon.com, Inc., 1999a, p. 5 f.
195
Applegate, L.M., 2002a, p. 6
196
Applegate, L.M., Collura, M., 2000, p. 12
197
Applegate, L.M., 2002b, p. 2; Amazon.com, Inc., 2001, p. 5
198
Amazon.com, Inc., 2005a, p. 39
199
Applegate, L.M., Collura, M., 2000, p. 13 f.
200
Amazon.com, Inc., 2005a, p. 61
4 Conclusion and Outlook 22
4 Conclusion and Outlook
We discerned principles for success in electronic commerce and identified
context factors and value creation potentials in EC retailing, subject to a Por-
ter’s Branch Structure Analysis. We showed how the core strategies of the
first-mover Amazon, based on customer focus, continuous innovation and es-
tablished reputation, paved Amazon’s way to market leadership.
Amazon has managed to move beyond the status quo of being “one among
many” to become market leader. Constant groundbreaking is a critical factor
in its success. Amazon’s expertise not only in meeting customer require-
ments but in driving them through an advanced exploitation of technology in-
dicates that it strives to remain several steps ahead of the competition. Ama-
zon is shaping and leading the market rather than adapting to it. The ques-
tion that remains is whether Amazon will be able to continue to maintain its
leading position. Only time and further research will answer this issue.
Appendix 23
Appendix
Exhibit I
201
Stock
Management
Distribution Management
of Returns
Payment
Processing
Customer
Service
Storage
Handling
Warehousing
Commissioning
Packing
Decommissioning
Inventory
management
Availability and
Status information
Delivery /
Transport
Tracking & Tracing
Pick-up
Cash on delivery
Pick-up of returns
Acceptance
Control
Repair
Storage
Disposal
Financial
processing
Address validation
Credit
investigation
Credit card
clearing
Invoicing
Receipt of
payment
Dunning
Collection
procedure
Reclamation
Enquiries
Main processes / Functions
Partial processes
Overview of the fulfilment processes and their partial processes
Information /
Searching
Buying Execution After-Sales
Product enquiries
Availability
Pricing
Terms of delivery
Payment methods
Security
Login
Privacy
Site Performance
Technical
problems
Problems at login
Forgotten
password
Input of several
addresses
Ordering process
malfunctioning
Credit card is not
accepted
Availability
Shipping costs
Order cancellation
Technical
problems
Site Performance
Retarded delivery
Change of
address
Order cancellation
Returns / Refund /
Reclamations
Customer credits
Change of
personal data
Typical questions to
the customer service
of an online retailer
(per telephone, fax,
email or web)
Transaction
phases
Fulfilment-specific Issues in the EC transaction phases
201
Merz, M., 2002, p. 446, 453
Appendix 24
Exhibit II
202
Business Model Comparison – Land-based retailer vs. Amazon.com
Land-based retailer Amazon.com
Superstores 439 1
Titles per superstore 175.000 2.500.000
Occupancy costs (% sales*) 12% < 4%
Sales per operating employee $100.000 $300.000
Inventory turnover 2-3x 50-60x
Sales per square foot $250 $2000
Rent per square foot $20 $8.00
* includes Rental, Depreciation, Amortization, and Pre-Opening expenses
202
Source: Gurley, W.J. “Amazon.com: The Quintessential Wave Rider”, Deutsche Morgan Grenfell,
June 9, 1997; taken from: Katz, L.E., Amazon.com Going Public, in: Entrepreneurial Finance - A Case
Book, P.A. Gompers, W.A. Sahlman, New York, 2002, S. 538-568
Appendix 25
Exhibit III
203
Amazon.com Operating Cycle (as of 31.03.2004)
t
Day 0 20 23 44
-21 days
Product enters
inventory
Customer
purchase
Customer
payment
Supplier
paid
203
Szkutak, T., 2005, p. 7; Mui, C., 2004, p. 3
Appendix 26
Exhibit IV
204
Comparison of Book Pricing
Stores Internet
Borders Barnes &
Noble
Amazon Barnes-
andNo-
ble.com
List Price [US$]
Discount
Price [US$]
NY Tax @ 8.25%
Shipping and Handling [US$]
24.95
30%
17.47
1.44
-
24.95
30%
17.47
1.44
-
24.95
40%
14.97
-
3.95
24.95
30%
17.46
-
3.95
Beststeller
Hardcover
Into Thin Air
(Jon Kra-
kauer)
Total Cost [US$] 18.91 18.91 18.92 21.41
List Price [US$]
Discount
Price [US$]
NY Tax @ 8.25%
Shipping and Handling [US$]
25.95
10%
23.35
1.93
-
25.95
10%
23.35
1.93
-
25.95
30%
18.17
-
3.95
25.95
30%
18.16
-
3.95
Hardcover
Debt of
Honor
(Tom
Clancy)
Total Cost [US$] 25.28 25.28 22.12 22.11
List Price [US$]
Discount
Price [US$]
NY Tax @ 8.25%
Shipping and Handling [US$]
7.50
0%
7.50
.62
-
7.50
0%
7.50
.62
-
7.50
20%
6.00
-
3.95
7.50
20%
6.00
-
3.95
Paperback
Horse
Whisperer
(Nicholas
Evans)
Total Cost [US$] 8.12 8.12 9.95 9.95
204
Barry, D., 1997
Appendix 27
Exhibit V
205
Amazon’s Product Categories (2004)
- Apparel, shoes, and accessories
- Home, garden, and outdoor living products
- Baby care products
- Jewelry and watches
- Books
- Kitchenware and housewares
- Beauty
- Magazine subscriptions
- Camera and photography
- Music and musical instruments
- Cell phones and service
- Office products
- Computers and computer add-ons
- Software
- Consumer electronics
- Sports and outdoors
- DVD’s, including rentals, and videos
- Tools and hardware
- Gourmet food
- Toys and video games
- Health and personal care
205
Amazon.com, Inc., 2005a, p. 4
Appendix 28
Exhibit VI
206
Amazon.com Worldwide Customer Growth, Quarterly Data (in millions)
206
Mendelson, H., Meza, P., 2001, p. 22
Appendix 29
Exhibit VII
207
Expansion of Amazon’s Product Categories, Active Customers, and Distribu-
tion Centers
207
Mendelson, H., Meza, P., 2001, p. 25
Appendix 30
Exhibit VIII
208
Growth Drivers – Amazon’s Virtuous Cycles
Sketch, Jeffrey P. Bezos, 2001
208
Mui, C., 2004, p. 4
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doc_294928534.pdf
In the early 1990s global communication networks and information technology (IT), especially the Internet, have lead to a deconstruction and reconfiguration of traditional value chains . In consequence, branch boundaries faded and new business models emerged.
Technische Universität Berlin
Fakultät VIII: Wirtschaft und Management
Institut für Technologie und Management
Fachgebiet Strategische Unternehmensführung
Prof. Dr. Michael Mirow
Seminar Paper on
Strategies to Achieve Market Leadership: The Example of Amazon
(Summer term 2005)
presented by:
Sören Preibusch, 215995
Kottbusser Damm 24
10967 Berlin
Matthias Fleckenstein, 215274
Magistratsweg 21
13593 Berlin
Berlin, May 17, 2005
Table of Contents I
Table of Contents
Table of Contents ............................................................................................ I
Table of Abbreviations.................................................................................... II
Table of Figures............................................................................................. III
Table of Tables..............................................................................................IV
1 Introduction.................................................................................................. 1
2 Market Leadership as a Strategic Goal in Electronic Commerce ................ 1
2.1 Value Chains and Actors in EC............................................................. 1
2.2 Principles for Success in Electronic Commerce.................................... 3
2.3 Porter’s Branch Structure Analysis applied to EC Markets ................... 4
2.4 Context Factors and Value Creation Potentials in EC Markets............. 8
2.5 First Mover Advantage and the Role of the Pioneer ............................. 9
3 Amazon.com – The Road to Market Leadership ....................................... 10
3.1 Company Portrait ................................................................................ 10
3.2 Redefining Book Retailing: Amazon vs. Barnes & Noble.................... 11
3.3 Realizing the Value Creation Potentials.............................................. 13
3.4 Exploiting First Mover Advantages...................................................... 21
4 Conclusion and Outlook ............................................................................ 22
Appendix ...................................................................................................... 23
References ................................................................................................... 31
Table of Abbreviations II
Table of Abbreviations
B Billion
DBW Die Betriebswirtschaft
EB Electronic Business
EC Electronic Commerce
EM Electronic Market
FMA First Mover Advantage
ICT Information and Communication Technologies
IT Information Technology
M Million
unpaged Document is not a paged media
ZfB Zeitschrift für Betriebswirtschaftslehre
zfbf Zeitschrift für betriebswirtschaftliche Forschung
As used herein, “Amazon.com” and similar terms include Amazon.com, Inc.
and its subsidiaries, unless the context indicates otherwise.
Table of Figures III
Table of Figures
Figure 1: Porter’s Five Forces Model (including the major determinant of
each force) ..................................................................................................... 5
Figure 2: Context Factors and Value Creation Potentials in Electronic
Commerce...................................................................................................... 8
Table of Tables IV
Table of Tables
Table 1: The transaction relationships in Electronic Commerce ................... 2
1 Introduction 1
1 Introduction
In the early 1990s global communication networks and information technol-
ogy (IT), especially the Internet, have lead to a deconstruction and reconfigu-
ration of traditional value chains
1
. In consequence, branch boundaries faded
and new business models emerged.
2
Opportunities to expand into reshaped
business segments and to develop innovative products and services in order
to attract valuable customers appeared.
3
By considering the case of Ama-
zon.com Inc., we will show how dedicated strategies helped to acquire mar-
ket leadership in these new business environments.
4
The rest of this paper is organized as follows: In section 2, we will explore
value chains and actors in EC. Principles of success are discussed, and
based on Porter’s Branch Structure Analysis, we will define strategic context
factors and carve out value creation potentials in Electronic Markets. In sec-
tion 3, we will analyze how these theoretically derived principles apply to the
case of Amazon.com.
2 Market Leadership as a Strategic Goal in Electronic Commerce
2.1 Value Chains and Actors in EC
Influenced by rapid technological progress, the terms Electronic Business
(EB) and Electronic Commerce (EC) have evolved over time to include all
aspects of “internetworked technologies”.
5
A canonical definition is still miss-
ing. Today, EC is a part of EB.
6
For this paper we will adopt Wirtz’s definition:
EB describes the “preparation as well as the partial, respective total support,
processing and maintenance of performance exchange processes via elec-
tronic networks”.
7
EC focuses on the transaction processes on the distribu-
tion side and their support. Throughout this paper, we will use the following
1
Picot, A., 1996; Zerdick, A. et al., 1999; Picot, A., Reichwald, R., Wigand, R.T., 1998, p. 19 ff.; Wei-
ber, R., McLachlan, C., 2000, p. 119
2
Schweitzer, M., 2000, p. 42; Mahadevan, B.,2000, p. 55
3
Prahalad, C.K., Hamel, G., 1990, p. 239; Bate, J.D., Johnston Jr., R.E., 2005, p. 12
4
Koob, C., 2000, p. 27 f.; Drucker, P.D., 1999
5
Ware et al., 1997, p. 29; Whinston, A.B., Stahl, D.O., Choi, S.-Y.,1997, p. 12
6
Rebstock, M., 2000, p. 7
7
Wirtz, B.W., 2000, p. 33: „Anbahnung sowie die teilweise respektive vollständige Unterstützung, Ab-
wicklung, und Aufrechterhaltung von Leistungsaustauschprozessen mittels elektronischer Netze”
2 Market Leadership as a Strategic Goal in Electronic Commerce 2
definition adapted from Rebstock, Kalakota/Whinston, and Wamser:
8
“EC is
the electronic, market-mediated buying and selling of information, products,
and services via computer networks and their support in all transaction
phases”.
The Electronic Market (EM) electronically maps information and communica-
tion processes between market players in computer networks.
9
This process
is called mediation and enables the coordination of business interactions be-
tween the players in all transaction phases;
10
information phase, negotiation
phase and execution phase, form the transaction process (see Exhibit I).
11
EMs represent a virtualization of the location where supply and demand
meet.
12
Characteristics of electronic markets are: (1) the “anytime and any-
place”-principle, i.e. the ubiquity of market access, which enables trading and
selling without spatiotemporal restrictions;
13
(2) augmented market transpar-
ency
14
which results in (3) reduced transaction costs for example through
search facilities;
15
and (4) increased speed of transaction processes.
16
DEMAND SIDE
Consumer Business Administration
C
o
n
s
u
m
e
r
Consumer-to-
Consumer
g.e. small advertisements
on the Internet
Consumer-to-
Business
g.e. job market with ads from job-
seekers
Consumer-to-
Administration
g.e. tax handling for private indi-
viduals (income tax etc.)
B
u
s
i
n
e
s
s
Business-to-
Consumer
g.e. Electronic Retailing
Business-to-
Business
g.e. company orders via EDI from
suppliers
Business-to-
Administration
g.e. tax handling
for enterprises
S
U
P
P
L
Y
S
I
D
E
A
d
m
i
n
i
s
t
r
.
Administration-to-
Consumer
g.e. handling of support services
(social welfare, unemployment aid)
Administration-to-
Business
g.e. procurement of public admini-
strations via Internet
Administration-to-
Administration
g.e. transactions between inter-
/national public administrations
Table 1: The transaction relationships in Electronic Commerce
17
8
Rebstock, M., 2000, p. 6; Kalakota, R., Whinston, A.B., 1996, p. 1; Wamser, C., 2001, p. 11
9
Bakos, Y.J., 1991a, p. 31 ff.
10
Bakos, Y.J., 1991b, p. 296
11
Reichwald, R., 1999, p. 284; Schmid, B., 1993, p. 468
12
Picot, A., Reichwald, R., Wigand, R.T., 1998, p. 318; Bakos, Y.J., 1998, p. 13 f.
13
Timmers, P., 1999, p. 11 f.; Schmid, B., 1993, p. 468
14
Wamser, C., 2000, p. 20
15
Barryman et al., 1998, p. 154 f.; Bakos, Y.J., 1997, p. 1684
16
Wamser, C., 2000, ibid.
17
Hermanns, A., Sauter, M., 1999b, p. 23
2 Market Leadership as a Strategic Goal in Electronic Commerce 3
The transactions in Electronic Markets can be classified with regard to the in-
volved actors. The market players take the role of either the customer or the
merchant during the transaction process
18
: for the demand-side as well as for
the supply side, one distinguishes Consumers (abbreviated by C), Busi-
nesses (B) and governmental agencies or Administrations (A), resulting in
the nine-field matrix presented in Table 1.
2.2 Principles for Success in Electronic Commerce
Similarly to the marketing principles identified by Bruhn
19
, Wamser empha-
sizes seven prerequisites for successful operation and goal-oriented design
in EC:
20
- Market Orientation as one of the most important characteristics of modern
management.
21
All activities should target the relevant market. The par-
ticularities of electronic markets have to be captured, arising chances and
upcoming risks must be assessed.
22
- User Orientation as the maximization of the customers’ subjectively per-
ceived utility. Instead of focusing on a technology driven approach, the
relevant market’s needs should be targeted.
23
Nonetheless, new tech-
nologies can serve as a hint how to offer substantial surplus value to cus-
tomers, for example through automated recommender systems.
24
This, in
turn can translate into a competitive advantage.
- Systematic Management Processes are required in order to cope with
concurrently upcoming business opportunities. A methodical way of pro-
ceeding, including planning, monitoring, and controlling of all EC activi-
ties, is necessary.
25
18
Merz, M., 2002, p. 22
19
Bruhn. M., 1997, p. 14 f.
20
Wamser, C., 2001, p. 30 ff.
21
Kotler, P., Bliemel, F., 1999, p. 1173; Nieschlag, R., Dichtl, E., Hörschgen, H., 1997, p. 958; Meffert,
H., 1998, p. 976 ff.
22
Wamser, C., 2001, p. 31
23
Wamser, C., Fink, D.H., 1997a, p. 47; Timmers, P., 1999, p. 24
24
Palmer, J., 2002, p. 102 f.; Schafer, J.B., Konstan, J.A., Riedl, J., 2001, p. 1; Resnick, P., Varian, H.
1997, p. 56
25
Wildemann, H., 2000, p. 22; Wamser, C., Fink, D.H., 1997, p. 48; Eggenberger, C., Klein, S., 2000,
p. 181 f.
2 Market Leadership as a Strategic Goal in Electronic Commerce 4
- Innovative Solution Concepts are required in order to cope with changing
market conditions and customer expectations, to distinguish oneself from
competitors, and to systematically source innovations.
26
- Integration of Activities on the operational and technological level is es-
sential, because isolated, group-constrained solutions cannot tap the full
synergy and performance potentials that can be achieved with integrated
solutions.
27
- Creation of Economic Values must be the guiding principle of all techno-
logical activities. Technology is not an end in itself; the profitability of each
investment has to be assessed by a cost-benefit analysis.
28
These principles determine the fundamental orientation of EC. Thus, suc-
cessful EC-Management is the systematic planning, monitoring and control-
ling of the innovative, market and utility oriented implementation of ICT; it as-
sures value orientation and goal oriented integration of all activities to form a
holistic and operational effective solution.
29
EC-Management includes a thor-
ough analysis of the branch attractiveness, and the enterprise’s competitive
strengths as presented in the next two sections.
2.3 Porter’s Branch Structure Analysis applied to EC Markets
Branch attractiveness and patterns of competition are mainly determined by
branch structures.
30
Porter distinguishes five structural features (“Five
Forces”) that act as driving forces of branch competition (see Figure 1).
Based on this analysis, the company can develop competitive strategies to
realize sustained competitive advantages. Porter explicitly mentions the
Internet as a new technology that can impact on all five forces.
31
Even though Porter argues that suppliers can have increased bargaining
power due to information asymmetries, higher specialization than the branch,
threat of forward integration, and switching costs on the buyer side, their po-
26
Wildemann, H., 2000, p. 37
27
Gascoyne, R.J., Ozcubukcu, K., 1997, p. 114; Kalakota, R., Whinston, A.B., 1996, p. 403; Sauter,
M., 1999, p.115
28
Wamser, C., Fink, D.H., 1997b, p. 218; Hermanns, A., 1999, p. 98; Picot, A., 1985, p. 383
29
Wamser, C., 2001, p. 34
30
Porter, M.E., 1980; Porter, M.E., 1985
31
Porter, M.E., 1999a, p. 12; Porter, M.E., 1999b, p. 233
2 Market Leadership as a Strategic Goal in Electronic Commerce 5
sition is weakened in context of EC.
32
Increased market transparency re-
duces buyer search and information costs in an extended procurement mar-
ket, equalizing information asymmetries.
33
Innovative trading mechanisms al-
low buyers to strengthen their bargaining position, for example by pooling
their sourcing activities or by reverse auctioning.
34
Switching costs are de-
creasing mainly due to higher market transparency and open standards in
ICT; lock-in effects caused by proprietary standards are diminishing.
35
Buyers can profit from decreased switching costs, and are better informed
on a more transparent market where competitors are “only one click away”.
36
This effect becomes stronger as the products become increasingly inter-
changeable.
37
Industry
Competitors
Intensity
of Rivalry
Buyers Suppliers
New Entrants
Substitutes
Bargaining Power
of Suppliers
Bargaining Power
of Buyers
T
h
r
e
a
t
o
f
N
e
w
E
n
t
r
a
n
t
s
T
h
r
e
a
t
o
f
S
u
b
s
t
i
t
u
t
e
s
Determinants of Buyer Power
Bargaining Leverage Price Sensitivity
? Buyer concentration vs. ? Price total purchase
firm concentration ? Product differences
? Buyer volume ? Brand identity
? Buyer switching costs ? Impact on quality /
relative to firm switching costs performance
? Ability to backward integrate ? Buyer profits
? Substitute products ? Decision makers’
? Pull-through incentives
Rivalry Determinants
? Industry growth
? Fixed (or storage) costs / value added
? Intermittent overcapacity
? Product differences
? Brand identity
? Switching costs
? Concentration and balance
? Informational complexity
? Diversity of competitors
? Corporate Stakes
? Exit barriers
Determinants of
Substitution Threat
? Relative price/ perfor-
mance of substitutes
? Switching costs
? Buyer propensity to
substitute
Determinants of Supplier Power
? Differentiation of inputs
? Switching costs of suppliers and
firms in the industry
? Presence of substitute inputs
? Supplier concentration
? Importance of volume to supplier
? Cost relative to total purchases in
the industry
? Impact of inputs on cost or
differentiation
? Threat of forward integration
relative to threat of backward
integration by firms in the industry
Entry Barriers
? Economies of scale
? Proprietary product differences
? Brand identity
? Switching costs
? Capital requirements
? Access to distribution
? Absolute cost advantages
? Proprietary learning curve
? Access to necessary inputs
? Proprietary low-cost product design
? Government policy
? Expected retaliation
Figure 1: Porter’s Five Forces Model (including the major determinant of each force)
38
32
Porter, M.E., 1999a, p. 61 ff.
33
Evans, P.B., Wurster, T.S., 1998, p. 62; Haertsch, P., 2000, p. 126 f.
34
Kaplan, S., Sawhney, M., 2000, p. 101
35
Downes, L., Mui, C., 1998, p. 126 f.; Shapiro, C., Varian, H.R., 1998, p. 126 f.
36
Clarke, K., 2001, p. 160
37
Porter, M.E., 1999a, p. 58 ff
38
Porter, M.E., 1985, p. 6
2 Market Leadership as a Strategic Goal in Electronic Commerce 6
The threat of new competitors entering the market, favoured by lower mar-
ket entry barriers, lies in an expanded supply, leading to falling prices and
shrinking margins.
39
EC enterprises face international competition from new
branches, because branch barriers dissolve under the influence of techno-
logical innovations, industries converge and national frontiers become insig-
nificant in Electronic Markets.
40
Market entry barriers are lower as the distri-
bution channels are unlimited; asset bindings and initial investment costs are
reduced.
41
In retailing, optimized transaction processes and powerful logistics
systems allow to operate merely without stocks, as customers orders are di-
rectly forwarded to suppliers.
42
However, new technologies can be used to build new market entry barriers:
first, differentiation allows creating customer loyalty; second, especially the
pioneer can attract a critical mass, which stimulates demand through a multi-
plication effect.
43
This particularly holds under the influence of network ef-
fects.
44
The knowledge of preferences and buying patterns of the target
groups is crucial, as it represents a prerequisite for individualized customer
offerings as a base for customer loyalty.
45
These strategies lie beyond the
traditional entry barriers discussed in industrial organization theory.
46
In principle, all companies in one branch compete with those in other
branches that offer potential substitutes whose price-performance ratios de-
termine the level of competition.
47
EC has lead to disintermediation and rein-
termediation, where traditional intermediaries disappear and new ones de-
velop, especially at the so called “point of frictions” in the value chains.
48
In
the case of electronic retailing, specialized EC companies have a competitive
advantage over less experienced traditional retailers expanding into EC;
49
technological innovations lead to increased substitution pressure towards
former technologies.
50
39
Porter, M.E., 1999a, p. 37 ff
40
Schad, H., 2000, p. 112; Prahalad, C.H., Hamel, G., 1994, p. 10
41
Hoffman, D.L., Novak. T.P., 1997, p. 50
42
Wamser, C., 2001, p. 53
43
Link, J., 2000, p. 12
44
Clement, M., Litfin, T., Peters, K., 1999, p. 83; Schoder, D., 1995, p. 18 f.
45
Haertsch, P., 2000, p. 125; See also section 3.3
46
Christensen, C.M., 1997, p. 210
47
Porter, M.E., 1999a, p. 56 ff.
48
Schad, H., 2000, p. 102
49
Albers, S., Peters, K., 2000, p. 188 ff.; Albers, S., Peters, K., 1997, p. 71
50
Bettis, R.A., Hitt, M.A., 1995, p. 13
2 Market Leadership as a Strategic Goal in Electronic Commerce 7
Rivalry among competitors increases in EC due to higher market transpar-
ency, decreasing switching costs, and innovative trading mechanisms; low-
ered market entry barriers give the customers higher bargaining power and
attract new competitors.
51
In stagnating markets rivalry among competitors is
evident;
52
but also in the rapidly growing EC market, competition is high as
many small and flexible firms penetrate the market with low costs.
53
The
phenomenon “Co-opetition”, describing a simultaneously competitive and co-
operative relationship among the market players,
54
does not reduce the level
of competition.
55
One cannot deny that Porter’s Branch Structure Analysis had a lasting impact
on both theory and practice of strategic planning. However, literature argues
that Porter’s Structure Analysis has only reduced explanatory potential in the
context of high branch dynamics:
56
“The structural analysis of industries, in-
stead of being a specialized planning tool for forecasting evolution over con-
siderable periods, becomes, instead, useful as a capability to quickly under-
stand the continuously evolving nature of the industry.”
57
Some authors have
proposed extensions to Porter’s model. Downes and Mui introduce three ad-
ditional competitive forces: digitization, globalization, and deregulation.
58
Haertsch adds a group of “complementers” (i.e. enterprises supplying com-
plementary goods) to form the sixth competitive force of the “Digital Econ-
omy”.
59
In order to cope with the challenges arising from the dynamics in EC, com-
panies must develop and deploy adequate competitive strategies, combining
differentiation (or preference) and cost-leadership strategies to implement
outpacing strategies.
51
Becker, J., 1998, p. 371; Hermanns, A., Sauter, M., 1999a, p. 5
52
Neumann, J., Morgenstern, O., 1961
53
Schad, H., 2000, p. 113
54
Brandenburger, A.M., Nalebuff, B.J., 1996, p. 18; Preiss, K., Goldman, S.L., Nagel, R.N., 1996
55
Wamser, C., 2001, p. 59
56
De Kare-Silver, M., 1998, p. 46; Feuer, R., Chaharbaghi, K., 1995, p. 20; Moore, J., 1996, p. 142
57
Bettis, R.A., Hitt, M.A., 1995, p. 12 f.
58
Downes, L., Mui, C., 1998, p. 64 ff.
59
Haertsch, P., 2000, p. 131 f.; Wildemann, H., 2000, p. 33
2 Market Leadership as a Strategic Goal in Electronic Commerce 8
2.4 Context Factors and Value Creation Potentials in EC Markets
The tapping of the economic potentials is influenced by exogenous competiti-
ve context factors. Link and Hildebrand
60
have developed a generic assess-
ment framework for economic trends that can be applied to EC (Figure 2).
61
Context Factors Value Creation Potentials
Diversity Individualization Potential
Variability Swiftness Potential
Complexity Innovation Potential
Price Sensitivity Cost Leadership Potential
Reputation Potential Intensity of Competition
Figure 2: Context Factors and Value Creation Potentials in Electronic Commerce
62
Diversity describes the heterogeneousness of the company’s environment,
especially with regard to actual and potential customer needs and prefer-
ences. Variability describes the swiftness and frequency of changes of the
company’s relevant environments.
63
Complexity describes the versatility of
changes and their interdependencies on multiple layers.
64
Price sensitivity
describes the price’s impact on the customer’s purchasing behaviour. Inten-
sity of competition describes the degree of rivalry among competitors in a
given branch. This conceptual framework has been empirically verified.
65
All competitive strategies aiming at realizing a sustained Comparative Com-
petitive Advantage
66
, pivot around five interdependent potentials, corre-
sponding to the five context factors: (1) the individualization potential derives
from the user’s information and guidance needs in the context of complex
decision finding processes;
67
the tailor-made, personalized satisfaction of
customer desires (also called “One-to-One Marketing”) requires continuous
60
Link, J., Hildebrand, V., 1993, p. 12 ff.
61
Wamser, C., 2001, p. 72
62
Wamser, C., 2001, p. 72
63
Laux, H., Liermann, F., 1997, p. 248 ff.
64
Bleicher, K., 2004, p. 13
65
Ho, J., 1997, unpaged; Reichheld, F.F., Schefter, P., 2000, p. 107
66
Backhaus, K., 2003, 9 ff.
67
Link, J., Tiedtke, D., 2000, p. 110
2 Market Leadership as a Strategic Goal in Electronic Commerce 9
customer contact and efficient data mining techniques.
68
Companies seek to
establish learning relationships with their customers;
69
(2) the swiftness po-
tential in time competition allows companies to realize “economies of
speed”,
70
whose components are pioneer advantages, and immediate, rapid
customer satisfaction.
71
Weiber and Kollmann identify a “Spead-Leader-
Strategy” aiming at realizing a time lead compared to competitors.
72
On the
operational level, the swiftness potential lies in the acceleration of transaction
processes through efficient, integrated operations and fulfilment systems;
73
(3) the innovation potential is an independent dimension in competition, veri-
fied empirically, and finds expression in technological and market leader-
ship.
74
Innovations are especially important when other differentiation poten-
tials are exhausted and competition is intense. However, a lasting compara-
tive innovative advantage is difficult to achieve, due to reduced imitation pro-
tection on the highly transparent electronic markets;
75
(4) the reputation po-
tential can only be established in the long run, as the company has to prove
itself as trustworthy.
76
Particularly in the non-tangible EC, transactions have a
high share of experience and trust characteristics.
77
The customer prefers
buying at the company she trusts more;
78
(5) the cost leadership potential
complements the other four differentiation potentials. However, cost leader-
ship is hard to achieve and to defend in EC.
79
2.5 First Mover Advantage and the Role of the Pioneer
First Mover Advantages (FMAs) are no automatism
80
; they must be mined on
the supply and demand side.
81
On the supply side, (1) innovations, protected
by patents and copyrights,
82
enable FMAs through a temporary monopoly;
(2) economies of scale allow limit pricing strategies, which set market entry
68
Meyer, A., Pfeiffer, M., 2000, p. 293
69
Meyer, A., Davidson, J.H., 2001, p. 58; Charlet, J.-C., 1998, p. 1 ff.
70
Simon, H., 1989, p. 27, 79 f., 83; Backhaus, K., 2003, p. 16 ff.
71
Meffert, H., 1998, p. 264
72
Weiber, R., Kollmann, T., 2000, p. 58
73
Simon, H., 1989, p. 81
74
Albach, H., 1989, p. 1339
75
Wildemann, H., 2000, p. 57
76
Domizlaff, H., 1982, p. 89; Schade, C., Schott, E., 1993, p. 501
77
Shapiro, C., Varian, H.R., 1998, p. 5 f.
78
Kaas, K.P., 1990, p. 545 f.; Kaas, K.P., 1992, p. 897
79
Haertsch, P., 2000, p. 134
80
Kerin, R.A., Varadarajan, R., Peterson, R.A., 1992, p. 42
81
Golder, P.N., Tellis, G.J., 1993, p. 159 f.; Vidal, M., 1995, p. 45 ff.
82
Lieberman, M.B., Montgomery, D.B., 1988, p. 43
3 Amazon.com – The Road to Market Leadership 10
barriers as followers would have to operate with negative margins;
83
(3) the
pioneer has a more advanced position on the experience curve, allowing
lower average costs;
84
(4) pioneers can closely tie in partners into collabora-
tion networks, making it harder for followers to integrate their value chains.
85
On the demand side, (5) product differentiation creates FMAs as the pioneer
occupies niches that thus cannot be exploited by followers;
86
(6) pioneers
can use the period before followers enter the market to achieve a “critical
mass” and to set a standard which are stabilized by network effects;
87
(7)
switching costs and lock-in effects lead to forced customer loyalty, even if the
follower has an objectively superior selling proposition;
88
(8) the pioneer can
shape user preferences by influencing cognitive and emotional product per-
ception and establish its offer as a reference by which followers will be
judged;
89
(9) the pioneer can establish a strong reputation of trustworthiness,
reliability and quality leadership.
90
Literature states that demand side effects
have much higher FMA potential in the context of EC.
91
3 Amazon.com – The Road to Market Leadership
3.1 Company Portrait
Amazon.com Inc., a Fortune 500 company, incorporated in 1994 / Washing-
ton and reincorporated in 1996 / Delaware, went online on the WWW in July
1995. Since its IPO in May 1997, Amazon is listed on the Nasdaq National
Market. Amazon and its affiliates operate seven retail websites: amazon.com
/ .co.uk / .de / .co.jp / .fr / .ca, and joyo.com; a9.com and alexa.com, also op-
erated by Amazon since 2004, enable search and navigation, imdb.com, is a
movie database.
92
The company’s stated strategy is to “focus on customer
83
Lambkin, M., 1992, p. 6
84
Henderson, B.D., 1974, p. 14 ff.; Vidal, M., 1995, p. 47
85
Gemünden, H.G., 2003, p. 16
86
Meyer, A., 1996, p. 66
87
Mueller, D.C., 1997, p. 832: “the potential demand for a second mover’s product […] far below that of
that of the first mover.”
88
Lieberman, M.B., Montgomery, D.B., 1988, p. 46
89
Carpenter, G.S., Nakamoto, K., 1989, p. 286 ff.; Alpert, F.H., Kamins. M.A., 1995, p. 34
90
Spremann, K., 1988, p. 618 ff
91
Meyer, A., Specht, M., 2002, p. 263 f.
92
Amazon.com, Inc., 2005a, p. 55; Amazon.com, Inc., 2004a, unpaged; Amazon.com, Inc., 2004b, un-
paged
3 Amazon.com – The Road to Market Leadership 11
experience by offering [their] customers low prices, convenience, and a wide
selection of merchandise.”
93
Started as a pure online book retailer,
94
Amazon.com began expanding its
product and service offering.
95
New business models were introduced in
1999,
96
web hosting and fulfilment service partnerships with traditional retail-
ers and consumer portals followed in 2000.
97
Despite rapid growth of revenues (up from 15.7M US$ in 1996 to 6.9B US$
at the end of 2004)
98
, Amazon generated operating losses (1.4B US$ net in
2000) and only reached profitability in 2003.
99
Since 2000, Amazon is the
largest Internet retailer,
100
reporting a customer base of more than 27M ac-
tive accounts by 2002/II (up from 0.34M in 1997/I).
101
3.2 Redefining Book Retailing: Amazon vs. Barnes & Noble
When Amazon went online, the book industry was highly fragmented with the
largest retailer Barnes & Noble (B&N) only representing 11% of total book
sales in the US.
102
B&N operated its stores as superstores (covering 6000m
2
and stocking up to 175.000 titles)
103
and mall-based stores (smaller in size
and selection), but also offered mail-ordering through catalogue services
104
.
B&N had a centralized logistics and distribution centre and could thus lever-
age scale economies in procurement by sourcing books directly from pub-
lishers, obtaining higher discounts than other book retailers, and avoiding
high mark-ups from wholesalers. Due to centralized stock, books could be
shipped to the points of sale within a few days, avoiding delivery delays from
publishers.
105
B&N installed an electronic store (management) system, ena-
bling real time information exchange among its stores, the distribution centre
93
Amazon.com, Inc., 2005a, p. 3
94
Leschly, S., Roberts, M.J., Sahlman, W.A., 2003, p. 1
95
See section 3.3
96
Hilliard, U., Horovitz, J., Kumar., N., 2000, p. 8
97
Applegate, L.M., 2002b, p. 1
98
Amazon.com, Inc., 2001, p. 19
99
Amazon.com, Inc., 2005a, p. 25
100
Hilliard, U., Horovitz, J., Kumar., N., 2000, p. 1
101
Applegate, L.M., 2002b, p. 7; Sahlman, W.A., Katz, L.E., 1999, p. 3
102
Sahlman, W.A., Katz, L.E., 1999, p. 4
103
Hilliard, U., Horovitz, J., Kumar., N., 2000, p. 2; Barnes & Noble, Inc., 1998, p. 13
104
Ghemawat, P., Baird, B., 2004, p. 5
105
Ghemawat, P., Baird, B., 2004, p. 5
3 Amazon.com – The Road to Market Leadership 12
and wholesalers with access to a 2.5M title database, though not accessible
for customers.
106
Amazon redefined traditional book retailing through a radically different ap-
proach: online, over the Internet.
107
Traditional book retailing has several
drawbacks. The selection of titles is physically limited by available store
space. Traditional retailers must invest in inventory, real estate and qualified
personnel for each retail location and it is impossible to provide “a custom-
ized store for every customer or to provide customized recommendations
without significantly increasing selling costs.”
108
Internet retailers have the
advantages of centralized inventory management and low occupancy costs.
A large and global group of customers can be reached from a single central
location, making the business model very scalable. It is possible to track con-
sumer purchasing patterns in order to better anticipate demand and to pro-
vide personalized services such as customized store fronts.
109
Amazon offered more than 1M titles in its database, but only carried 2000 of
them in its own warehouse. In contrast to B&N, Amazon sourced its books
mainly from wholesalers, because Amazon could not stock large shipments
from publishers and because deliveries from publishers took weeks to ar-
rive.
110
Book wholesalers, in contrast, could ship most orders within a couple
of days. Compared to B&N’s centralized stock strategy, Amazon’s just-in-
time procurement multiplied inventory turns and reduced working capital (see
Exhibit II),
111
but shrunk gross margins.
Amazon had the advantage of a negative operating cycle: credit card pay-
ments were received within a few days of purchase, but vendors were not
paid for up to 44 days of sale. In addition, Amazon did not actually carry in
inventory many of the products it sold, relying instead on suppliers to provide
fast fulfilment and shifting inventory risks to its vendors. Amazon’s typical op-
erating cycle was around -21 days, whereas the typical book retailing operat-
ing cycle was around +78 days.
112
Thus Amazon generated interest on the
106
Ghemawat, P., Baird, B., 2004, p. 7
107
Ghemawat, P., Baird, B., 2004, p. 8; Hof, R.D., 2004, p. 1
108
Covey, J., 1997, unpaged
109
Covey, J., 1997, unpaged
110
Ghemawat, P., Baird, B., 2004, p. 9
111
Gurley, W.J., 1997, p. 1
112
Burgelman, R.A., Meza, P., 2001, p. 4; Szkutak, T., 2004, p. 15; Mui, C., 2004, p. 3
3 Amazon.com – The Road to Market Leadership 13
full sale price (cost of goods and gross margin) for over a month (see Exhibit
III).
113
Amazon’s business model combined informational elements (virtual store-
front) with physical elements (operations). While Amazon highly invested in
information technology, with a strong focus on software rather than hardware,
its operations were practically limited to packing and shipping at that time.
114
Amazon’s core value propositions for customers buying books over the Inter-
net were convenience, selection, price, and customer service. Its web store
was online 24-7 and offered supplementary services, such as book recom-
mendations and reviews. Amazon had a database with 1.1M books, com-
pared to 175.000 books on site in the largest superstores.
115
Customers
could use the database search functionality to find even rare and out-of-print
titles filtered by different search criteria. Amazon also sought to price com-
petitively by offering discounts equivalent to those offered by large book
chains (see Exhibit IV).
116
Ease of shopping was provided through a simple
checkout procedure.
B&N did not launch its own online business until 1997. By that time, Amazon
had a strong leadership position in online book retailing, controlling over 75%
of all online book sales.
117
Sales had increased by 838% from 15.7M US$ in
1996 to 147.8M US$ in 1997 and cumulative customer accounts had grown
by 738% from 0.18M to 1.5M during the same period.
118
In the following sections we will analyze how Amazon realized the Value
Creation Potentials and the First Mover Advantages – as depicted in sections
2.4 and 2.5 – since 1997.
3.3 Realizing the Value Creation Potentials
Amazon claims to be “the Earth’s most customer centric company. It means
three things: listen, invent and personalize”.
119
In order to tap the Individu-
alization Potential, Amazon’s key value propositions to customers, besides
easy-to-use browsing and searching functionalities, include reviews and con-
113
Sahlman, W.A., Katz, L.E., 1999, p. 22
114
Applegate, L.M., 2002a, p. 4
115
Hilliard, U., Horovitz, J., Kumar., N., 2000, p. 2; Ghemawat, P., Baird, B., 2004, p. 9
116
Barry, D. et al., 1997, p. 1
117
Turban, E. et al., 2000, p. 430
118
Amazon.com, Inc., 1997, p.3
119
Bezos, J.P., 2000b, unpaged
3 Amazon.com – The Road to Market Leadership 14
tent services, an online community, recommendations and personalization
features. Latter comprise greeting customers by name, instant and personal-
ized recommendations and individual notification services.
120
Amazon pro-
vides content services, synopses, annotations, product reviews and ratings
by customers and (external) editorial staff, and interviews with authors and
artists; customers can order and select gifts from the gift centre where they
find recommendations from Amazon’s editors.
121
In late 1999, Amazon im-
plemented its “Wish List” feature, allowing customers to create an online wish
list of desired products that others could reference for gift-giving purposes.
122
Since the beginning, Amazon’s website included standard-setting functional-
ities such as customer accounts including multiple shipping and invoice ad-
dresses, diverse payment options, auto-login features and product prefer-
ences based on which Amazon delivers thematically matching newsletters.
Users are provided shopping carts, and can merge and split orders not yet
shipped; past orders are collected in an order history. Stock availability is dis-
played online for each product, and not yet released items can be pre-
ordered to be automatically shipped upon availability: Amazon puts “each
customer at the centre of her own universe”.
123
The CEO Jeffrey P. Bezos summarized Amazon’s personalization efforts by
stating: “If we have seventeen million customers, we should have seventeen
million stores.”
124
Tapping the individualization potential also implies carrying out a differentia-
tion strategy. As theoretically anchored in Ansoff’s Strategy Matrix, differen-
tiation is the expansion into new markets with new products (see Exhibit
V).
125
Since 1998, Amazon went global, successively opening the web de-
pendencies amazon.co.uk and amazon.de, through acquisitions in the local
markets. They reached market leadership in the new segments in the same
year and served over 17 million customers in over 150 countries in 1999.
126
Until 2005, the Japanese, Canadian and French web sites were launched.
127
120
Amazon.com, Inc., 2001, p. 3
121
Amazon.com, Inc., 1997, p. 3
122
Amazon.com, Inc., 2000a, p. 4
123
Bezos, J.P., 2000b, unpaged
124
Bezos, J.P., 2000b, unpaged
125
Ansoff, A.I., Stewart, J.M., 1967, p. 81
126
Amazon.com, Inc., 2000a, p. 1
127
Amazon.com, Inc., 2005a, p. 3
3 Amazon.com – The Road to Market Leadership 15
In an empirical study evaluating expected and perceived service quality from
EC retailers, comparing B&N, Amazon and Bookstore.About.com, Amazon
received best average rankings in 20 out of 22 questions, including the as-
pects Tangibles, Reliability, Responsiveness, Assurance and Empathy.
128
In 1999, Amazon extended its logistics and fulfilment infrastructure by build-
ing automated fulfilment centres, customer service centres, and warehouses
that were interfaced with Amazon’s EC platform, enabling fast response and
delivery times, in order to tap the Swiftness Potential.
129
Orders that could
not be filled from the company’s inventory were automatically forwarded to
Amazon’s suppliers. Due to arrangements with distributors, products could
be shipped to Amazon’s distribution centres within hours.
130
In addition,
Amazon established agreements with outsourcing partners, such as Federal
Express, to help manage its logistics and shipping operations.
131
Due to its
new fulfilment and customer service infrastructure, Amazon was able to cope
with an increasing number of customer orders: “In early December 1999, the
company logged peak shipping of roughly 16M US$ of products in one day,
which was more than the company’s total sales in 1996. […] During the 2000
holiday season, Amazon shipped more than 31M items with over 99% accu-
racy.”
132
The availability of company-owned distribution centres, built to 70-
80% overcapacity,
133
enabled Amazon to begin sourcing books directly from
publishers, resulting in higher margins by avoiding mark-ups from wholesal-
ers.
134
Amazon avoided time-consuming media clashes,
135
by cross-functionally in-
tegrating web site, consumer service units, payment processing and ware-
house operations systems, resulting in a fully integrated EC platform.
136
Attracted by Amazon’s success, new competitors entered the Internet retail-
ing market. EC retailing became intensely competitive and Amazon faced
numerous strong competitors,
137
among them were online vendors as direct
128
Sullivan, J.R., Walstrom, K.A., 2001, p. 13
129
Leschly, S., Roberts, M.J., Sahlman, W.A., 2003, p. 4 f.; Mahadevan, B., 2000, p. 65
130
Amazon.com, Inc., 2000a, p. 6
131
Amazon.com, Inc., 2001, p. 2
132
Applegate, L.M., 2002a, p. 9 f.; Amazon.com, Inc. 2000b, unpaged
133
Rowen, M., Prudential Securities, 1999, p. 3; Applegate, L.M., Collura, M., 2000, p. 12
134
Applegate, L.M., 2002a, p. 10; Mahadevan, B., 2000, p. 63
135
Wamser, C., 2001, p. 80
136
Leschly, S., Roberts, M.J., Sahlman, W.A., 2003, p. 5
137
Amazon.com, Inc., 2000a, p. 7
3 Amazon.com – The Road to Market Leadership 16
competitors, and online auction services, Web portals, Web search engines,
online retailers using alternative distribution capabilities, publishers, distribu-
tors, manufacturers and physical-world retailers as indirect competitors.
138
Retailers specialized on a limited product range (so called “Category Killers”),
such as “Best Buy” or “Home Depot”, occupied high-margin niches.
139
Under these conditions, Amazon.com had to exploit its Innovation Potential
in order to hold its strategic position.
140
Since its beginning Amazon has been
an innovating company: its ordering system provided a fast checkout proce-
dure, storing customer information for future purchases and offering secure
credit card transactions.
141
Customers could check their order status online,
and were provided email and telephone support 24-7 via support centres.
142
By 1998, Amazon had developed EC innovations such as shopping carts, 1-
Click
®
-Ordering, personalized storefronts, and customer-friendly search and
browse features. Amazon implemented customer interface and channel inno-
vations:
143
The 1-Click-Technology allows customers to place an order by
clicking a single button without having to fill out an order form. Customer
shipping and billing information is automatically referenced.
144
Three quarters
of customers (73%) find it helpful and convenient when a web site remem-
bers basic information about them, such as names and addresses.
145
In
March 1999, Amazon introduced its auction service, which, in contrast to
eBay’s auction service, guaranteed buyers financial protection from fraud and
also provided access to Amazon’s customer service.
146
Later in 1999, Ama-
zon offered small and medium sized businesses (SMEs) the opportunity to
operate individual storefronts using Amazon’s EC platform by means of
“zShops”.
147
Also that year, Amazon started to provide web hosting and ful-
filment services to other online and offline retailers through its “Amazon
Commerce Network” (ACN), charging placement and referral fees.
148
An ex-
138
Amazon.com, Inc., 2000a, p. 9 f.; Applegate, L.M., Collura, M., 2000, p. 7
139
Applegate, L.M., 2002a, p. 11
140
Schewe, G., 1992, p. 968
141
Burgelman, R.A., Meza, P., 2001, p. 10; Louie, D.L., Rayport, J.F., 1998, p. 9
142
Hilliard, U., Horovitz, J., Kumar., N., 2000, p. 4 ff.
143
Campbell, M., Collins, A., 2001, p. 30
144
Amazon.com, Inc., 2000a, p. 4
145
Personalization Consortium, 2000, p. 2
146
Leschly, S., Roberts, M.J., Sahlman, W.A., 2003, p. 5; eBay Inc., 2005, unpaged
147
Amazon.com, Inc., 2000c, p. 1
148
Amazon.com, Inc., 2000a, p. 1
3 Amazon.com – The Road to Market Leadership 17
ample is the partnership with Toys'R'us: under a ten-year deal, Amazon
agreed to house Toys'R'us’ inventory, ship goods to consumers, process
payments, and perform post-sale customer service.
149
Amazon had to redefine its definition of “customer” through its new service
offerings.
150
At first, customers were defined as “buyers”, but since the intro-
duction of its marketplace initiative, third party sellers were equally important
customers. This change of perspective is reflected in Amazon’s “single store
strategy”.
151
Under this concept, Amazon presents its own merchandise
alongside its partner merchants’ offerings on the same product detail page
abolishing the previously existing store frontiers.
152
Amazon shifted its busi-
ness scope to be an “e-commerce platform”
153
, fulfilling B2C and hosting
C2C and B2B transactions.
In October 1999, Amazon launched its “Amazon.com Anywhere” service
which allowed customers to access the website from hand-held wireless de-
vices, such as cell phones and PDAs.
154
In November 2000, Amazon entered digital distribution. Amazon’s e-book
store offered best sellers and traditional works as well as e-audiobook titles,
including digital exclusives that were not available in conventional cassette
tape or CD formats.
155
Convenience-features like “Instant Order Update”
(which notifies customers if they are about to order the same item twice) and
“Look Inside the Book” (enabling customers to see front and back covers of
books, tables of contents and samples of inside pages) were other examples
of how Amazon translated technological innovations into surplus value to
customers. This feature was available on over 0.2M titles in 2001, exceeding
the number of titles available in the largest (offline) book superstores.
156
In 2004, Amazon launched its own search engine A9.com, which merges
several information sources, including Web and image search by Google,
reference information (encyclopaedia and dictionary) through GuruNet.com,
book text search through “Search Inside the Book” from Amazon, and movie
149
Leschly, S., Roberts, M.J., Sahlman, W.A., 2003, p. 6
150
„Customer Capitalism“, p. 383 f.
151
Leschly, S., Roberts, M.J., Sahlman, W.A., 2003, p. 7
152
Amazon.com, Inc., 2002, p. 2
153
Bezos, J.P., 2000a, p. 2
154
Amazon.com, Inc., 2000a, p. 4; Amazon.com, Inc., 2000c, p. 1
155
Applegate, L.M., 2002b, p. 4
156
Amazon.com, Inc., 2001, p. 3
3 Amazon.com – The Road to Market Leadership 18
information plus web site meta-data through its wholly owned subsidiaries
Alexa Web Search and the Internet Movie Database (imdb.com).
157
A9.com
is a highly personalized search engine, permanently remembering the user’s
search history, bookmarks, front-end configurations and clickstream. This
data is stored for future visits, and used for customized recommendations by
Amazon.com at each customer login.
158
This web search initiatives have stra-
tegic significance, since buyers conduct many product related searches prior
to a purchase, and the majority of pre-purchase search activity involves ge-
neric terms.
159
Besides implementing technical innovations, the company also has to tap its
Reputation Potential in order to generate customer loyalty.
160
As switching
costs and lock-in effects are usually low in EC, the risk of loosing the cus-
tomer is high: 28% of consumers who suffered a failed purchase attempt
stopped shopping and 23% stopped purchasing at the site in question.
161
Lit-
erature and practice have identified vendor trust as a crucial factor for EC
success.
162
Customer loyalty is a strategic goal since it directly translates into
higher revenues, higher margins, and into long-term profitability.
163
This es-
pecially applies to Amazon, which has nurtured loyalty in its customer bases
through continuous innovation in service offerings.
164
Customer loyalty is
measured by the willingness to purchase more, to recommend the vendor,
and by the trust in the vendor.
165
Online retailers usually face lower loyalty
compared to their offline counterparts: first, EC’s technological base, espe-
cially public networks are generally considered as insecure and untrust-
worthy;
166
second, the electronic retailing communication channel provides
less opportunities for confidence-building than face-to-face interactions.
167
157
Hof, R.D. (2004, p. 52; Amazon.com, Inc., 2004a, unpaged
158
A9.com, Inc., 2004, unpaged
159
DoubleClick Inc., 2005, p. 2
160
Pandya, A.M., Dholakia, N., 2005, p. 78
161
Pecaut, D.K., Silverstein, M.J., Stanger, P., Boston Consulting Group (BCG), 2000, p. 22
162
Torkzadeh, R., Dhillon, G., 2002, p. 201; Quelch, J.A., Klein, L.R., 1996, p. 70; Urban, G.L., Sultan,
F., Qualls, G.J., 2000, p. 40
163
Thompson, M., 1999, p. 1; Cooperstein, D. et al. (1999), p. 5 ff.
164
Reichheld, F.F., Markey Jr., R.G., Hopton, C., 2000, p. 178
165
Merz, M., 2002, p. 443 f.
166
Frost, F., 1999, p. 108
167
Sydow, J., 2000, p. 266
3 Amazon.com – The Road to Market Leadership 19
Nonetheless, Amazon reached the highest loyalty values, both in the online
book selling and retailing segments.
168
Research found, that perceived size and perceived reputation of an Internet
store increase customer trust in this store, leading to a more favourable atti-
tude towards that merchant, to reduced risk perceptions, and finally to an in-
creased willingness to buy.
169
In the case of Amazon, especially the per-
ceived size (as for example emphasized by claims like “Earth’s biggest selec-
tion”
170
) and the trustworthiness are positively correlated with reputation.
171
Chen and Dhillon show that the three factors competence, integrity and be-
nevolence build the multi-dimensional construct of trust.
172
They are posi-
tively influenced by company characteristics such as the reputation, brand
recognition and offline presence of the Internet vendor and the number of
years it has been in business. Website characteristics such as likeability,
functionality, usability, efficiency, reliability, portability, integrity, privacy and
security, as well as interaction characteristics such as service quality, cus-
tomer satisfaction, length of relationship, and marketing activities also impact
on the consumer’s perception of competence, integrity and benevolence.
173
Amazon strives to strengthen and broaden its brand name.
174
Opinion Re-
search found that 60% of U.S. adults were aware of the Amazon brand,
which ranked as the highest awareness of any EC brand name.
175
Similarly,
a study by Interbrand posted Amazon as the 57
th
most valuable brand – be-
tween Pampers and Hilton.
176
The functionalities implemented on Amazon’s
website – as depicted in the context of the individualization and innovation
potential – and the way they were made available to customers, raised Ama-
zon’s design principles to a reference for the whole EC retailing market.
177
Amazon was recognized as “best-in-class” by several sources.
178
It was
ranked among the best in overall performance, in quality based on interface,
168
Jarvenpaa, S.L., Tractinsky, N., Vitale, M., 2000, p. 57; GfK, 2001, p. 1
169
Jarvenpaa, S.L., Tractinsky, N., Vitale, M., 2000, p. 59 f.
170
Amazon.com, Inc., 2005b, unpaged
171
Jarvenpaa, S.L., Tractinsky, N., Vitale, M., 2000, p. 56 f.
172
Chen, S.C., Dhillon, G.S., 2003, p. 305
173
Chen, S.C., Dhillon, G.S., 2003, p. 306, 310, 312
174
Amazon.com, Inc., 2005a, p. 5; Anonymous, 1999, p. 5
175
Clarke, K., 2001, p. 164
176
Ries, D., Truong, V., Unterberg, T., 1999, p. 4; Rowley, J., 2004, p. 133
177
Weiss, L.M., Capozzi, M.M., Prusak, L., 2004, p. 84; Constantinides, E., 2004 , p. 92
178
Amazon.com, Inc., 1999b, p. 1
3 Amazon.com – The Road to Market Leadership 20
customer service, convenience, and content.
179
As the pioneer in EC retail-
ing, Amazon used its potential to set up lasting customer relationships; based
on a rating among online retailers, Amazon reached the number one overall
customer satisfaction rating.
180
When Amazon expanded its product range,
181
it used the reputation transfer
method by which companies strive to transfer previously acquired reputation
from one branch to another.
182
Moreover, Amazon provides structures to third-parties in the field of auctions
and zShops that engender institution-based trust:
183
By means of institutional
mechanisms such as feedback features, escrow services, and credit card
guarantees, Amazon achieved to build a trustworthy marketplace and to en-
courage online transactions.
184
The customer’s comfort level in providing personal data increases with the
level of perceived vendor reputation.
185
Amazon’s service offerings such as
automated recommendations require a large data base,
186
and thus rely on
an outstanding reputation. The strategic potential of a gained reputation lead
is amplified, if it can be defended and sustained over a customer’s experi-
ence chain.
187
The strategic challenge for companies in EC markets is to differentiate them-
selves in the service dimension (as shown in the context of the individualiza-
tion, swiftness, innovation and reputation potentials) and in the price dimen-
sion.
188
To realize a Cost Leadership Potential in EC is hard since web-
based intermediaries make it easier to search for the lowest price by price
comparison features.
189
Amazon endeavours to offer its customers “the low-
est possible prices”
190
, as they consider low prices as a strategic factor for
future success.
191
Amazon’s pricing strategy also includes free shipping of-
179
Applegate, L.M., Collura, M., 2000, p. 14
180
Applegate, L.M., Collura, M., 2000, p. 15; Boyd, A., 2002, p. 177; Kotha, S., Rajgopal, S.,
Venkatachalam, M., 2004, p. 130
181
Amazon.com, Inc., 2005a, p. 4
182
Schade, C., Schott, E., 1993, p. 501; Simon, H., 1985, p. 19 ff.; Filson, D., 2004, p. 152
183
Malaga, R.A., 2001, S 410
184
Pavlou, P.A., Gefen, D., 2004, p. 38; Resnick, P. et al., 2000, p. 46
185
Wamser, C., 2001, p. 87
186
Weigend, A.S., 2003, p. 15
187
Simon, H., 1989, p. 89 f.; Kaas, K.P., 1990, p. 546
188
de Figueiredo, J.M., 2000, p. 45
189
de Figueiredo, J.M., 2000, p. 46
190
Amazon.com, Inc., 2005a, p. 55
191
Amazon.com, Inc., 2005a, p. 36; Merrilees, B., 2001, p. 185
3 Amazon.com – The Road to Market Leadership 21
fers, and since 2005, members of the “Amazon Prime” program can benefit
from free two-day shipping and discounted overnight shipping.
192
3.4 Exploiting First Mover Advantages
Due to their time advantage, pioneers in EC can realize significant FMAs by
setting standards, and protecting innovations by patents and copyrights.
193
Amazon has pioneered proprietary technologies for its web site manage-
ment, search, customer interaction, recommendation, transaction processing
and fulfilment services and systems.
194
Amazon patented its 1-Click
®
tech-
nology, as well as its Bid-Click
®
auction bidding process,
195
and in 2000 was
also granted a patent on its Amazon Associates Program and on its book
recommendation service BookMatcher, which generates automatic recom-
mendations based on customer purchases.
196
Amazon licenses components
of its EC platform to third party sellers and hosts third-party sellers’ websites
providing its shopping technology.
197
Amazon realized a FMA with the concept of syndicated selling through its
Associates and Syndicated Stores programs.
198
The members of the Associ-
ates Network, including Internet companies such as AOL.com, Yahoo, Net-
scape, Excite and the AltaVista Search Service, recommend Amazon prod-
ucts to their own visitors and earn a referral fee and a commission in case of
completed purchases.
199
Amazon participates in cooperative advertising ar-
rangements with some of its vendors, and with other third parties.
200
As shown in section 3.3, Amazon realized all demand-side FMAs depicted in
section 2.5 (numbers (6) to (10)), by tapping its various Value Creation Po-
tentials. However, Amazon has not yet succeeded in the most difficult matter
of course in strategic planning: its Operating Efficiency is still low, overca-
pacities in operations and fulfilment overshadow its business perspectives,
and losses accumulated over years are a burden for the future.
192
Amazon.com, Inc., 2005a, p. 35
193
Goolsbee, A., 1999, p.14; Golden, W., Hughes, M., Gallagher, P., 2003, p. 39
194
Amazon.com, Inc., 1999a, p. 5 f.
195
Applegate, L.M., 2002a, p. 6
196
Applegate, L.M., Collura, M., 2000, p. 12
197
Applegate, L.M., 2002b, p. 2; Amazon.com, Inc., 2001, p. 5
198
Amazon.com, Inc., 2005a, p. 39
199
Applegate, L.M., Collura, M., 2000, p. 13 f.
200
Amazon.com, Inc., 2005a, p. 61
4 Conclusion and Outlook 22
4 Conclusion and Outlook
We discerned principles for success in electronic commerce and identified
context factors and value creation potentials in EC retailing, subject to a Por-
ter’s Branch Structure Analysis. We showed how the core strategies of the
first-mover Amazon, based on customer focus, continuous innovation and es-
tablished reputation, paved Amazon’s way to market leadership.
Amazon has managed to move beyond the status quo of being “one among
many” to become market leader. Constant groundbreaking is a critical factor
in its success. Amazon’s expertise not only in meeting customer require-
ments but in driving them through an advanced exploitation of technology in-
dicates that it strives to remain several steps ahead of the competition. Ama-
zon is shaping and leading the market rather than adapting to it. The ques-
tion that remains is whether Amazon will be able to continue to maintain its
leading position. Only time and further research will answer this issue.
Appendix 23
Appendix
Exhibit I
201
Stock
Management
Distribution Management
of Returns
Payment
Processing
Customer
Service
Storage
Handling
Warehousing
Commissioning
Packing
Decommissioning
Inventory
management
Availability and
Status information
Delivery /
Transport
Tracking & Tracing
Pick-up
Cash on delivery
Pick-up of returns
Acceptance
Control
Repair
Storage
Disposal
Financial
processing
Address validation
Credit
investigation
Credit card
clearing
Invoicing
Receipt of
payment
Dunning
Collection
procedure
Reclamation
Enquiries
Main processes / Functions
Partial processes
Overview of the fulfilment processes and their partial processes
Information /
Searching
Buying Execution After-Sales
Product enquiries
Availability
Pricing
Terms of delivery
Payment methods
Security
Login
Privacy
Site Performance
Technical
problems
Problems at login
Forgotten
password
Input of several
addresses
Ordering process
malfunctioning
Credit card is not
accepted
Availability
Shipping costs
Order cancellation
Technical
problems
Site Performance
Retarded delivery
Change of
address
Order cancellation
Returns / Refund /
Reclamations
Customer credits
Change of
personal data
Typical questions to
the customer service
of an online retailer
(per telephone, fax,
email or web)
Transaction
phases
Fulfilment-specific Issues in the EC transaction phases
201
Merz, M., 2002, p. 446, 453
Appendix 24
Exhibit II
202
Business Model Comparison – Land-based retailer vs. Amazon.com
Land-based retailer Amazon.com
Superstores 439 1
Titles per superstore 175.000 2.500.000
Occupancy costs (% sales*) 12% < 4%
Sales per operating employee $100.000 $300.000
Inventory turnover 2-3x 50-60x
Sales per square foot $250 $2000
Rent per square foot $20 $8.00
* includes Rental, Depreciation, Amortization, and Pre-Opening expenses
202
Source: Gurley, W.J. “Amazon.com: The Quintessential Wave Rider”, Deutsche Morgan Grenfell,
June 9, 1997; taken from: Katz, L.E., Amazon.com Going Public, in: Entrepreneurial Finance - A Case
Book, P.A. Gompers, W.A. Sahlman, New York, 2002, S. 538-568
Appendix 25
Exhibit III
203
Amazon.com Operating Cycle (as of 31.03.2004)
t
Day 0 20 23 44
-21 days
Product enters
inventory
Customer
purchase
Customer
payment
Supplier
paid
203
Szkutak, T., 2005, p. 7; Mui, C., 2004, p. 3
Appendix 26
Exhibit IV
204
Comparison of Book Pricing
Stores Internet
Borders Barnes &
Noble
Amazon Barnes-
andNo-
ble.com
List Price [US$]
Discount
Price [US$]
NY Tax @ 8.25%
Shipping and Handling [US$]
24.95
30%
17.47
1.44
-
24.95
30%
17.47
1.44
-
24.95
40%
14.97
-
3.95
24.95
30%
17.46
-
3.95
Beststeller
Hardcover
Into Thin Air
(Jon Kra-
kauer)
Total Cost [US$] 18.91 18.91 18.92 21.41
List Price [US$]
Discount
Price [US$]
NY Tax @ 8.25%
Shipping and Handling [US$]
25.95
10%
23.35
1.93
-
25.95
10%
23.35
1.93
-
25.95
30%
18.17
-
3.95
25.95
30%
18.16
-
3.95
Hardcover
Debt of
Honor
(Tom
Clancy)
Total Cost [US$] 25.28 25.28 22.12 22.11
List Price [US$]
Discount
Price [US$]
NY Tax @ 8.25%
Shipping and Handling [US$]
7.50
0%
7.50
.62
-
7.50
0%
7.50
.62
-
7.50
20%
6.00
-
3.95
7.50
20%
6.00
-
3.95
Paperback
Horse
Whisperer
(Nicholas
Evans)
Total Cost [US$] 8.12 8.12 9.95 9.95
204
Barry, D., 1997
Appendix 27
Exhibit V
205
Amazon’s Product Categories (2004)
- Apparel, shoes, and accessories
- Home, garden, and outdoor living products
- Baby care products
- Jewelry and watches
- Books
- Kitchenware and housewares
- Beauty
- Magazine subscriptions
- Camera and photography
- Music and musical instruments
- Cell phones and service
- Office products
- Computers and computer add-ons
- Software
- Consumer electronics
- Sports and outdoors
- DVD’s, including rentals, and videos
- Tools and hardware
- Gourmet food
- Toys and video games
- Health and personal care
205
Amazon.com, Inc., 2005a, p. 4
Appendix 28
Exhibit VI
206
Amazon.com Worldwide Customer Growth, Quarterly Data (in millions)
206
Mendelson, H., Meza, P., 2001, p. 22
Appendix 29
Exhibit VII
207
Expansion of Amazon’s Product Categories, Active Customers, and Distribu-
tion Centers
207
Mendelson, H., Meza, P., 2001, p. 25
Appendix 30
Exhibit VIII
208
Growth Drivers – Amazon’s Virtuous Cycles
Sketch, Jeffrey P. Bezos, 2001
208
Mui, C., 2004, p. 4
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