Executive Summary
Amazon is the largest online retailer in the world. As an organization that primarily focuses on e-commerce, Amazon adopted a concentric diversification strategy to help it achieve its corporate goals. Concentric diversification involves the exploration of new products and markets with the objective of gaining strategic fit (“Analysis of Amazon’s Corporate Strategy”, 2020). The primary rationale for using the corporate strategy is the profitability potential of other industries, the feasibility of the cost of entry, and the potential to better the organization’s position. Currently, Amazon has utilized the diversification strategy to explore the attractive industry of cloud computing and the global expansion of the business.
General Analysis of Corporate Strategy
The primary corporate strategy adopted by Amazon is diversification. Diversification is a type of growth marketing strategy that targets to increase profitability through greater sales acquired from new products and new markets (Kannan et al., 2012). The increase of market heterogeneity of enterprise products has helped Amazon cement its position as a leader in online retailing. To be specific, the organization’s corporate strategy can be categorized as concentric diversification. The strategy is built on taking advantage of the technological potential for business success and adopting a cost leadership strategy with the target of offering the maximum value for its customers at the lowest prices (“Analysis of Amazon’s Corporate Strategy”, 2020). At the corporate level, the management relies on three primary rationales when taking actions and making decisions related to diversification. First, the management considers the attractiveness of the industry it intends to explore (Ketchen et al., 2013). Amazon has been targeting industries that have strong profit potential. Another rationale that guides Amazon’s actions and decision-making is the cost of entering the new industry (Ketchen et al., 2013). Before the organization can decide to invest in a new industry, it must be sure that it will be able to recoup the expenses over a given period. Finally, a diversification decision will also be influenced by its potential to put the organization in a better position in the future (Ketchen et al., 2013). Unless diversification gives rise to a competitive advantage, Amazon will avoid it.
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The business logic behind Amazon’s selection of diversification strategy includes the need to enhance competitiveness. At the moment, Amazon relies on discounts on non-differentiated goods to increase sales. However, since these products are also available on its competitors’ online platform, the level of competition is higher. Through the diversification of its operation, Amazon obtains economies of scale, along with scope and market influence will give it a competitive edge as the online retail industry is reaching a point of saturation (Le, 2019). Also, the use of diversification strategy is motivated by the need to maximize resource utilization. Moreover, the diversification strategy provides the organization with an opportunity to diversify risk.
Formulation of the Corporate Strategy
Diversification strategies are built on multiple possible motives. In the case of Amazon, its motivation to use the concentric diversification strategy can be explained using the market power theory, the resource-based motive, and the synergetic motive. According to the market power theory, the winning of competition in an industry is a positive impact of a multi-segment strategy (Wanjira, 2019). Through the reduction of competition on the market due to its dominance, the strategy can increase market share in the industry and thus having a positive impact on corporate performance. Elsewhere, the resource-based motive discusses the link between an organization’s internal resources, strategy, and performances (Wanjira, 2019). Ideally, an organization is expected to accrue sticky assets to allow it to compete effectively with other companies. Diversification is a technique used by Amazon to achieve a permanent benefit over its rivals; it is a technique employed by the organization to use its capital profitably. The synergetic motive, on the other hand, involves the use of diversification to increase the organization’s market strength and thus help it to enhance its long-term strategic role (Wanjira, 2019). Unless adequate synergies and competitive advantage are achieved, diversification can lead to negative business outcomes.
In conjunction with the market power theory, the organization targets to improve its market position through diversification. Through diversification, the organization can achieve a better position in the market through enhanced competitiveness. The synergic involvement in multiple industries will also enhance competition and put the organization in a better off position in the long-term. Also, as outlined by the resource-based motive, Amazon is currently taking advantage of its profitability by investing in attractive industries. The investment in these new industries is motivated by the need to maximize resource utilization. Generally, there is a consistency between the elements of the diversification strategy and the organization’s rationale of decisions and actions.
Implementation of Corporate Strategy
Throughout the process of implementing its corporate strategy, Amazon has identified its need to grow, consistency with the organization’s internal strength and resources, motivation to take advantage of and target marketplace strategies, and maintaining consistency between its strategies and its sources of competitive advantage. The ensure that it remains better off in the long-term, Amazon has recognized its core competencies and strives to maintain consistency between its strategic decisions and its core competencies (“Analysis of Amazon’s Corporate Strategy”, 2020). The organization has tried to ensure that all its strategies complement and supplements its core competencies. Amazon ventured into the Tablet computer market with its Kindle Fire devices. However, the venture was not successful since it was a non-core diversification.
Recently, Amazon has expanded and diversified into cloud-based services. Cloud computing is an attractive industry that has a huge profit potential following the increasing use of Big Data technology by multiple organizations (“Analysis of Amazon’s Corporate Strategy”, 2020). The venture into the industry is to help the organization gain a strategic fit; Amazon targets to attain market leadership positions in the industry. Besides, as outlined above, a good diversification should complement or supplement an organization’s core competencies. Diversification into the cloud computing industry complements Amazon’s current business model that deals with online platforms. Through the Amazon Web Services (AWS), the organization will be able to offer services, including data management, hosting services, cloud storage, and other cloud computing services (“Analysis of Amazon’s Corporate Strategy”, 2020). Its involvement with cloud computing ensures that the organization’s diversification is consistent with its internal resources. Exploring other complementary ventures, such as artificial intelligence and digital streaming, will ensure the long-term success of the company.
In addition, Amazon has been expanding its operation to facilitate quick growth and actualize economies of scale. Through targeting a large market area, the organization has managed to increase its sales over the years. With the creation of dedicated online portals in multiple nationals around the world, the organization has managed to deliver products around the globe. The exploration of new markets has helped it acquire a competitive advantage in the industry.
Conclusion and Recommendations
Diversification, particularly the concentric diversification strategy, is the primary strategy adopted by Amazon. As an online retailer, the organization has recently been venturing into new industries. The strategy is effective for the organization due to the saturation of the online retailing industry. Besides, the use of the strategy helps the organization to enhance its competitiveness and effectively utilize its resources. The organization has taken a great interest in the cloud computing industry, especially with Amazon Web Services. The strong profitability potential of the cloud computing industry ensures that Amazon will enjoy long-term benefits from the diversification. To effectively diversify into other industries, it is recommended for organizations to explore ventures that are consistent with their core competencies. Amazon should avoid venturing into non-core competencies and take advantage of its core competencies.
References
Analysis of Amazon’s Corporate Strategy. (2020). Management Study Guide . https://www.managementstudyguide.com/analysis-of-amazon-corporate-strategy.htm
Kannan, P., & Saravanan, R. (2012). Diversification-strategies for managing a business. EXCEL International Journal of Multidisciplinary Management Studies , 2 (5), 64-73.
Ketchen, D. J., & Short, J. (2013). Mastering strategic management . Simon Fraser University.
Le, H. (2019). Literature Review on Diversification Strategy, Enterprise Core Competence and Enterprise Performance. American Journal of Industrial and Business Management , 9 (1), 91-108.
Wanjira, G. (2019). Adoption of diversification strategies and the performance of state-owned sugar firms in western region in Kenya (Doctoral dissertation, MMUST).
