The Competitive Advantage of a Low-Cost Provider Strategy In 1996, shortly after

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The Competitive Advantage of a Low-Cost Provider Strategy

In 1996, shortly after founding Amazon.com, CEO Jeff Bezos told his employees, “When you are small, someone else that is bigger can always come along and take away what you have.” Since then, the company has relentlessly pursued growth, aiming to become the global cost leader in “customer-centric E-commerce” across nearly all consumer merchandise lines. Amazon.com now offers over 230 million items for sale in America—approximately 30 times more than Walmart—and its annual sales are greater than the next five largest e-retailers combined.

In scaling up, Amazon has achieved lower costs not only through economies of scale, but also by increasing its bargaining power over its suppliers and distribution partners. With thousands of suppliers, Amazon.com is not reliant on any one relationship. Suppliers, however, have few other alternative e-retailers that can match Amazon’s reach and popularity. This gives Amazon bargaining power when negotiating revenue sharing and payment schedules. Amazon has even been able to negotiate for space inside suppliers’ warehouses, reducing their own inventory costs.

On the distribution side, Amazon has been developing its own capabilities to reduce reliance on third-party delivery services. Unlike most mega retailers, Amazon’s distribution operation was designed to send small orders to residential customers. Amazon.com attained proximity to its customers by building a substantial network of warehousing facilities and processing capability—249 fulfillment and delivery stations globally. This wide footprint decreases the marginal cost of quick delivery, as well as Amazon’s reliance on cross-country delivery services. In addition, Amazon has adopted innovative delivery services to further lower costs and extend its reach. In India and the UK, for example, through Easy Ship, Amazon’s crew picks up orders directly from sellers, eliminating the time and cost of sending goods to a warehouse and the need for more space.

Amazon’s size has also enabled it to spread the fixed costs of its massive up-front investment in automation across many units. Amazon.com was a pioneer of algorithms generating customized recommendations for customers. While developing these algorithms was resource-intensive, the costs of employing them are low. The more Amazon uses its automated sales tools to drive revenue, the more the up-front development cost is spread thin across total revenue. As a result, the company has lower capital intensity for each dollar of sales than other large retailers (like Walmart and Target). Other proprietary tools that increase the volume and speed of sales—without increasing variable costs—include Amazon.com’s patented One Click Buy feature. All in all, these moves have helped secure Amazon’s position as the low-cost provider in this industry.

Note: Developed with Danielle G. Garver.

Sources: Company websites; seekingalpha.com/article/2247493-amazons-competitive-advantage-quantified; Brad Stone, The Everything Store (New York: Back Bay Books, 2013); www.reuters.com/article/us-amazon-com-india-logistics-idUSKCN0T12PL20151112 (accessed February 16, 2016).

Amazon has been particularly effective in managing which of the following types of cost drivers?

Multiple Choice

A. Supply chain efficiencies, input costs, communication and information technology, and learning and experience

B. Advanced production technology, vertical integration, outsourcing, and input costs

C. Communication and information technology, production technology, outsourcing, and incentive systems

D. Economies of scale, capacity utilization, bargaining power, information and production technology, and design

E. Learning and experience curve effects, employee incentives, bargaining power, and production technology

Explanation / Answer

As per the case study it can be said that option D may be the suitable option.

Option D.

Economies of scale, capacity utilisation, bargaining power, information and production technology, and design.

Economies of scale of Amazon helps to have a competitive advantage over smaller entities as it provide products of lower cost. As the productive capacity of Amazon is much greater so it has much ability to utilize capacity. As Amazon achieved low cost so they gained a bargaining power over the suppliers as well as the distributors. The company has become the largest e-commerce in United States because of their improved technology than other retailers such as Walmart, Target etc.

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