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).

A low-cost provider strategy is appropriate for use in the E-commerce industry for all of the following reasons except

Multiple Choice

A. there are few ways to achieve product differentiation that have value to buyers.

B. price competition among rival sellers is vigorous.

C. buyers incur low costs in switching their purchase from one seller to another.

D. consumer buyers have significant power to bargain down prices.

E. most buyers use the product in the same ways.

Explanation / Answer

E. most buyers use the product in the same ways

All other options mentioned are reasons for having a low cost provider strategy but if most buyers use the product in the same way, it has no relationship with the low cost aspect of the industry.

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