Amazon’s Success Models and Factors

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Preston Bezos founded Amazon Corporation in 1994. The online retail investment is the planet’s highest-earning online retailer with $87 billion in annual earnings and 3.3 billion net income in 2019. The corporation is listed on the NASDAQ market with the symbol ‘AMZN’ at $2,356.95 per share. Beginning with selling books, the retail giant has since expanded to an array of product groupings such as user electronics, networking, electronic downloads, apparel and shoes, beauty and health, baby toys, house equipment, garden tools and industrial gadgets. The company leveraged product accessibility, price differentiation and choice (Demir, 2019; Ketokivi, 2017; Messner, 2016; Mohar, Abdullah and Ho, 2016). The business involves the production of digital equipment to earn sales via an online portal. The business also supplies a platform for developers, filmmakers, instrumentalists and other systems analysts to market products and content. Amazon has widened its assortment of goods and service solutions to serve customers, partners and content producers. The corporation facilitates variety selection, lower costs and customer experience by supplying simple, quick, reliable satisfaction and timely client support. The characteristics of Amazon’s retail sites incorporate personalized approvals, client testimonials, secure payment platforms, comprehensive product data, children registries, client wish lists and book reviews. Amazon enables third-party vendors to display their materials and services on the company’s retail sites. As a result, the business generates earnings per share. Likewise, the business provides partnerships via Amazon Web Services (AWS) that delivers cloud solutions, databank and analytics services.

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The Corporation’s strategic management has been critical to its success in the retail industry. The company adopts a customer-centric model, which involves asking clients what they desire, and strategising how the customer’s requirements will be delivered (Dennis et al., 2015). The model relies on innovation and personalisation to drive new products and services for consumer satisfaction. On its success factors, the retail giant leveraged on customer value propositions to allocate lower prices, fast delivery logistics and volume selections (Fan et al., 2017). Amazon redefined traditional publication retailing via an online strategy. Traditional publication retailing has many drawbacks, and the change resulted in the branding of Amazon.

Background to the Industry

The choice of names is limited by the shop area. Conventional retailers need to invest in stocks and qualified employees for every retail location, and it is difficult to supply a customised shop for each client or to provide personalised recommendations without redoubling selling expenses. However, web retailers possess the benefits of centralised data management and very low occupancy expenses. As a result, a global group of consumers could be attained from one central place, which makes the company model scalable. It is also possible to monitor consumer-buying patterns, to better expect needs and to offer custom-made services. Amazon’s business model integrated informational components (virtual storefront) with physical components. Although Amazon invested in information technologies, having a solid focus on applications instead of hardware, its operations are restricted to packaging and delivery.

Amazon’s success factors are driven by the mastery of a competitive edge concept wherein the investment focus on innovation, achieving the aims of economies of scale, and utilising the proficiencies from the collaborations between its external variables and internal resources. The corporation uses Big Data as a segmentation tool to assess and categorise customer behaviour. Amazon’s generic success model could be called concentric diversification. This strategy relies on leveraging technical skills for company achievement and observing a cost management plan geared toward supplying the utmost value for the clients at the lowest cost. The supply chain is critical for manufacturing and non-production procedures in every organisation (Halkjær and Lueg, 2017). The principal feature of Amazon’s supply system is value optimisation based on client requirements. The framework for distribution facilities in North America reflects the version of the best distribution system in satisfying customers by geographic site.

Amazon’s Porters Five Forces

Competitive Rivalry or Contest (Strong force)

Amazon competes against powerful rivals such as Netflix, Walmart, PetSmart, Microsoft, and Alibaba Group. Under the competitive force, company aggressiveness, accessibility of substitutes and low shifting process are responsible for the strong intensity of rivalry in the Internet retail sector. Retail companies are competitive because the investors deploy a modest strategic drive to attract customers and gain market advantage.

Customer’s Bargaining Power (Strong force)

The company’s strategic objectives highlight the organisation’s customer-centric model for e-commerce enterprise. Under the bargaining force, the firm tests the impact of buyers on the investment and the market environment. Information transfer, low shifting prices and substitute accessibility encourage the powerful intensity of customers bargaining power in influencing Amazon. Consumers need access to quality information about online solutions, services and products. This external variable influences the organisation because clients locate options via online retail support. The minimal switching costs make it effortless for customers to move from Amazon to different companies. The availability of substitutes enables customers to change from one defective product or solution to another. For example, rather than buying on Amazon’s e-commerce site, a client can shop from Walmart’s shops, which can be strategically located across the USA. The external aspects within this force reveal that Amazon must assume the bargaining power of consumers as a chief element in addressing business challenges via the online retail portal.

Supplier’s Bargaining Power (Moderate force)

Suppliers can restrict and hoard the accessibility of service solutions, materials, or products on Amazon. Forward integration, supplier’s size and population summarise the force variable on Amazon’s investment. Supplier’s population enables dubious retailers to create fluctuations in costs of service solutions and electronic devices. Such a move will affect the organisation’s operational expenses.

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Threat from Competitors (Strong force)

The force analysis shows that Amazon must overcome the threat of substitute services and solutions to remain a dominant retail investment. Factors such as a low price index, high accessibility of substitutes and the low price of competing products influence the threat from rival investments. As a result, the corporation constantly addresses the force of substitutes as it undermines the firm’s performance. The minimal switching costs reveal that clients can easily move from the organisation to other retailers (Hami, Moula and Maulan, 2018). Customers can easily opt to purchase from Walmart shops or other retail stores rather than purchasing from Amazon. The accessibility of substitute service solutions or goods at reduced prices is a threat to business growth and sustainability.

The threat of New Entrants (Strong force)

New companies potentially decrease Amazon’s market share in the retail industry. Amazon encounters the weak risk of this force because of the low shifting costs, cost of business registration and high economics of sale. Amazon’s customers can leap to a new business, hence empowering such investments to inflict a weak force against the provider. However, the dynamics of creating an alternative brand name and the cost of innovative deployment hinder the establishment of new organisations.

Sensitivity Analysis and Risk Analysis

The method used to determine how independent factors can affect a dependent variable under certain conditions is described as a sensitivity evaluation. Sensitivity analysis depends on more than one input factors within the particular boundaries (Heizer, et al., 2017). For example, the analyst may test the influence of adjustments in interest taxes on a stock’s share value. A sensitivity analysis decides how distinct measurement of different factors influences a specific dependent variable under the same market environment and trade boundaries. Sensitivity investigations study the sources of uncertainty within a mathematical framework contribute to the framework’s uncertainty.

The evaluation is used within a specific market environment or trade boundaries that rely on several input factors. Risk represents the ability of a company to create cash flows to fulfil its duties. Attempting to perform a firm’s risk evaluation leads to bankruptcy or suggests an immediate focus on the firm’s solvency and ability to work effectively. Highly leveraged businesses are susceptible to this approach as it exposes the firm’s operations and cash flow. The ratios of this segment are categorised into solvency and liquidity ratios. Liquidity ratios are values that measure an organisation’s capability to satisfy several debt commitments.

Trend and Ratio Analysis

Cash Ratio

Short-term creditors often use this ratio because of the metric measures a firm’s liquidity. The ratio reveals how the management can repay its financial obligations in the short-term. Cash ratio excludes the firm’s account receivable it is a continuous flow. Based on this standard of measurement, a percentage greater than one shows that the firm has cash equivalents to cover short-term trades and still have money for daily operations. However, if the ratio is less than one, the organisation does not repay loans and debts in short-terms. Although this ratio shows an organisation’s liquidity, it does not represent the firm’s entire financial capability or capital strength. Based on these assumptions, this report will calculate Amazon’s cash ratio and make a comparative analysis with two competitors. The paper will consider Alibaba and Apple corporation in the evaluation.

The assumptions for the analysis: Cash ratio = (Cash + Cash Equivalents) ÷ Current Liabilities

The value for each variable was extracted from the company’s financial and income statements of the previous fiscal year.

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Amazon = $87,334,000,0000 ÷ $43,816,000,000 = 1.99

Apple = $40,484,000,000 ÷ $80,676,000,000 = 0.50

Alibaba = $15,345,000,000 ÷ $11,086,000,000 = 1.38

The analysis shows that Amazon’s has the highest cash ratio compared to Apple and Alibaba. However, the cash ratio shows that Alibaba Group is a fierce competitor because its metric stood at 1.38. Therefore, the Alibaba Group has a good financial record and can conduct aggressive marketing. Based on this result, Amazon must use an aggressive marketing strategy to manage consumer requirements and limit the buyer’s options to use substitute products and service solutions.

Current Ratio

The current ratio measures an investment’s capability to cover both short-term and long- term trades. Unlike the cash ratio that shows the firm’s capability to repay short-term debts, the current ratio reveals the firm’s status for long-term and short-term loans and liabilities. Investors use this measurement to remove or redouble their shareholder strength and attract recent clients. In the space of innovative digital platforms, loan approvals require informed decision-making and analysis. As a result, investors can leverage this metric to allocate resources to profitable product lines. If the ratio is below one, it could show the firm’s inability to repay its obligations after depositing cash equivalents or liquidating its properties. However, a high metric ratio reveals the firm’s failure to organise its daily operations and the working capital.

A firm’s current ratio = Current Assets ÷ Current Liabilities

Based on this mathematical formula, Amazon’s current ratio = $68,681,000,000 ÷ $30,716,000,000 = 2.24.

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Apple = $100,234,000,000 ÷ $75,036,000,000 = 1.34.

Alibaba = $10,829,000,000 ÷ $7,398,000,000 = 1.46.

Organisations with a current ratio above one show the capacity to meet loan repayment dates and obligations. A percentage of less than one would represent liquidity issues or cash flow postings that may lead to bankruptcy. Based on the analysis, the three organisations have a high current ratio.

Quick Ratio

Quick ratio tests a firm’s capacity to repay existing obligations using quick assets. The standard of measurement implies that Amazon can convert quick assets to cash receivables within ninety days. Under the measurement, a ratio above one shows that the firm has one additional dollar to pay its obligations. A percentage of less than one shows the organisation’s inability to repay existing liabilities with quick assets. Quick assets include marketable securities, cash, account receivables, short-term investment, prepaid expenditures and taxes.

The mathematical formula for quick ratio = (Cash + Marketable Securities + Receivables) ÷ Current Liabilities.

Amazon = $87,334,000,0000 + $23,006,000,000 + $20,259,000,000/$43,816,000,000 = 2.98

Apple = $40,484,000,000 + $20,500,000,000 + $19,150,000,000/ $80,676,000,000 = 0.99 Alibaba = $10,345,000,000 + $1,650,000,000 + $1,303,000,000 $11,086,000,000 = 1.20

The results above illustrate each company’s capacity to cover its current obligations with quick assets under ninety days. The quick ratio of Amazon and Alibaba is above one. By implication, these organisations can repay short-term obligations with cash assets.

According to the organisation’s yearly report, Amazon’s annual sales revenue rate was 20 per cent in 2019. The business continues to create several capital investments every year together with cash flow from operations. Apart from being in a giant in the retail industry, Amazon provides a publishing platform for both writers and editors. The business takes a revenue cut from each publication in the market. The company began as an internet bookseller and still expanding its publishing company.

The corporation deployed cloud solutions to cover its web services. The AWS is an online cloud infrastructure constructed by Amazon. Programmers and businesses conduct online transactions using Amazon’s cloud services. Amazon’s adventure running a comprehensive service solution terminal facilitated the deployment of its AWS. AWS is an efficient source of revenue, and its earnings grew by 45 per cent in 2018. Given the continuing transition into cloud solutions, AWS has a solid growth prospect for the near future.

Organisations concentrate on their prospective earnings and profits to sustain their presence in a competitive market. At Amazon, it had been about the top-line earnings narrative. Jeff Bezos believes that by raising market share, it may finally influence economies of scale to reduce the price. With the firm’s high share value, the management exerts a pricing power over customers. However, critics assert that the firm must reveal more gains and pay dividends to compensate for the huge financial earnings and encourage investors. The operating margin stood at 8.5% in the first quarter of 2019. The development of Amazon Web Services facilitated the rise in the firm’s operating margin. Figure 1 and Table 1 shows the ratio analysis of Amazon, Apple and Alibaba Corporations.

Ratio Analysis
Figure 1: Ratio Analysis
Amazon Apple Alibaba
Cash ratio 1.99 0.54 1.34
Current ratio 2.34 1.34 1.46
Quick ratio 2.98 0.99 1.2

Table 1: Ratio Analysis

Amazon’s Sensitivity Analysis

Amazon generated above 220 billion in sales and earning $4.9per share by the end of 209. The company’s growth rate stood at 50% and was estimated to rise above the mark in the next five years. The firm’s stock price has been overvalued based on its price/earnings-to-growth rate. Depending on the Corporation’s current EPS and expected earnings growth, Amazon’s current PEG ratio is 4.87. However, Amazon’s worth could have a PEG ratio of 2.17 in 2022. The method used to determine how independent factors can affect a dependent variable under certain conditions is described as sensitive evaluation. Sensitivity analysis depends on more than one input factors within the particular boundaries. For example, the analyst may test the influence of adjustments in interest taxes on a stock’s share value. A sensitivity analysis decides how distinct measurement of different factors influences a specific dependent variable under the same market environment and trade boundaries. Sensitivity investigations study the sources of uncertainty within a mathematical framework contribute to the framework’s uncertainty (Kesari and Atulka, 2016). The evaluation is used within a specific market environment or trade boundaries that rely on several input factors. Risk represents the ability of a company to create cash flows to fulfil its duties. Attempting to perform a firm’s risk evaluation leads to bankruptcy or suggests an immediate focus on the firm’s solvency and ability to work effectively.

Reference List

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  2. Dennis, C et al. (2015) ‘Does social exclusion influence multiple channel use? The interconnections with community, happiness and wellbeing‘, Journal of Business Research, 69(3), pp. 1061–1070. Web.
  3. Fan, Y. et al. (2017) ‘Service strategy to improve operational capabilities in the public sector‘, The Service Industries Journal, 37(11–12), pp. 703–725. Web.
  4. Halkjær, S. and Lueg, R. (2017) ‘The effect of specialization on operational performance: a mixed-methods natural experiment in Danish healthcare services‘, International Journal of Operations & Production Management, 37(7), pp. 822–839. Web.
  5. Hami, A., Moula, F. and Maulan, S. (2018) ‘Public preferences toward shopping mall interior landscape design in Kuala Lumpur, Malaysia‘, Urban Forestry & Urban Greening, 30(1), pp. 1-7. Web.
  6. Heizer, J. et al. (2017) Operations management: Sustainability and Supply Chain Management. 12th edn. New Delhi: Pearson Education.
  7. Kesari, B. and Atulkar, S. (2016) ‘Satisfaction of mall shoppers: a study on perceived utilitarian and hedonic shopping values‘, Journal of Retailing and Consumer Services, 31(1), pp. 22–31. Web.
  8. Ketokivi, M. (2017) ‘Why locate manufacturing in a high-cost country? A case study of 35 production location decisions‘, Journal of Operations Management, 49–51(1), pp. 20–30. Web.
  9. Messner, M. (2016) ‘Does industry matter? How industry context shapes management accounting practice‘, Management Accounting Research, 31(1), pp. 103–111. Web.
  10. Mohar, A., Abdullah, F. and Ho, V. (2016) ‘Development and validations of a holistic service operations management instrument‘, Procedia – Social and Behavioral Sciences, 224(1), pp. 429–436. Web.

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