Amazon Inc.’s Cost Leadership Strategy: An Essay Analysis
Amazon Inc. is a multinational American-based institution focusing on e-commerce and web services. The organization has observed significant growth over the years based on its cost leadership strategy (Tou et al., 2019). Cost leadership strategy refers to an organization being a sector leader for low pricing. Businesses achieve this by successfully cutting revenue and reducing costs on all operations, such as marketing, packaging, and distribution. This paper will examine how Amazon Inc. uses cost leadership to gain a competitive advantage in the e-commerce industry.
Amazon’s business primarily practices cost leadership competitive strategy. Price, range, and convenience are the heart of their competitive strategy. According to Althafairi et al. (2019), Amazon carries out its operations with a razor-thin profit margin, and they have gained success based on several economies of scale, constant diversification, and innovation of different business processes. Analysts note that Amazon is a perfect example of how the scale works in business as it sells a massive load of items, only to receive huge profit overall and not make a profit on each item. Jeff Bezos, the organization’s founder and first CEO, claimed that people prefer low prices, selection, and first delivery. Therefore, through time the organization has been able to exceed consumer expectations on product delivery at an affordable cost while offering them a wide variety of products.
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Innovation and technology allow Amazon to exercise cost leadership. For instance, the organization uses network and computing technologies for maximum operation efficiency, consequently leading to low production costs. Taking into account the nature of online retailing, the organization benefits from process automation, normally employed in purchasing scheduling, processing, and other operational processes (Tou et al., 2019). These strategies allow the organization to minimize the cost of all its operations. Information technology is also central to the cost leadership strategy with Amazon Inc. heavily invests in research and development in order to allow it to optimize the efficiency of its IT resources. Additionally, the cost leadership strategy pushes the organization to reduce its price levels, as it impacts its marketing mix. Amazon is able to lower prices which directly attracts more consumers; therefore, through cost leadership, a competitive advantage is obtained.
Amazon Inc. enjoys several benefits of being a cost leader. It is able to pursue profit, at razor cut margins, making the market hostile for competitors. The strategy has allowed Amazon to gain dominance in North America and numerous international markets (Althafairi et al., 2019). The organization is in a position where it can withstand recessions better compared to its competitors, as its goods appeal to consumers on a budget. Additionally, it is more flexible as it can try new products in the market and discount products more often compared to its competitors. This allows them to attract a huge consumer base.
However, the strategy opens up Amazon to different market risks. The organization is particularly dependent on high sales volumes to make a profit. Therefore, the current reduction in consumer purchasing in most western nations due to the rise in inflation leaves the organization vulnerable (Tou et al., 2019). Additionally, the strategy has limited growth in several growing economies due to highly fragmented markets involving numerous brand loyal fragments, leaving a limited opportunity for high-volume sales.
In conclusion, cost leadership plays a central advantage in gaining market leadership. When cost leadership is combined with constant innovation, an organization can grow, as observed in Amazon Inc. However, it also leaves the organization vulnerable, especially since it requires massive sales volumes to make a profit.
References
Althafairi, B., Alhoumaida, N., Saxena, M., & Almsri, Z. (2019). Case study-AMAZON. Journal of the Community Development in Asia (JCDA), 2(2).
Tou, Y., Watanabe, C., Moriya, K., Vurpillat, V., & Neittaanmäki, P. (2019). A new concept of R&D in neo open innovation: transformation of R&D triggered by Amazon. International Journal of Managing Information Technology, 11(1).