Knowing, building, and fully leveraging strengths in the best manner possible is an important key to creating long-term competitive advantage. Amazon is a great, leading-edge company that has successfully developed and implemented compelling strategies that we can learn from.

In this article we examine simple tools that Amazon leveraged in conducting an internal assessment – to help it in its strategic planning process. Most large organizations conduct strategic planning, but in many cases real “strategy” and “planning” are missing. Instead too many strategic planning exercises are nothing more than budget positioning exercises. Not so with Amazon.

In the last article,”Strategic Planning Samples – Amazon Part 1” we mentioned that Amazon embraced what is known as the “design school model” of strategy development. Despite the title, the model is simple to understand and can be highly effective. It is the one used most by professors and consulting organizations. The diagram below is Henry Mintzberg’s illustration of the model.

Before looking at the internal assessment tools Amazon uses, take a moment to view these videos. Developing a competitive advantage is not rocket science. However, most large organizations struggle in seeing the obvious.

Becoming clear as to what will provide you a competitive advantage is paramount. We chase after the hot new industries where the risk is highest. The key is to sustained focus on smart strategies.

Amazon developed a value chain of itself to internal it can operationally best add value and maintain a competitive advantage. They used the value chain model from Michael Porter’s book, “Competitive Advantage: Creating and Sustaining Superior Performance.”

Primary activities are those needed to produce a product or services for the end customers. These activities typically include:

• Inbound Logistics: receiving goods from suppliers, and storing and moving those good
• Operations: Manufacturing or assembling the product
• Outbound Logistics: Sending the goods to wholesalers, retailers or directly to the end customer
• Marketing and Sales: Marketing involves understanding customer needs, communicating those needs, and promoting the end products.
• Service: Involves after-sales support (e.g., handling, complaints, installation, training)

Support activities help to facilitate or assist the primary activities of producing product. Examples include:

• Procurement: purchasing raw material and other items used in operations
• Human Resource Management: recruiting, hiring, firing, training, developing, compensating
• Technological Development: research and development, process automation, software, hardware, equipment, etc., to support operations
• Infrastructure: May include accounting, legal, finance, planning, public affairs, government relations, quality assurance and general management.

Amazon’s competitive advantages from a value chain perspective include:

• Strong technological infrastructure with a single platform
• High investments in technology development (e.g., Kindle) to best leverage digital products
• Great product forecasting system
• Print on demand
• Constantly soliciting suggestions on new products
• Easy and fast payment system
• 24 hour operations
• Free returns within 30 days

The resource based view helps an organization to determine where to invest in critical resources to have a competitive advantage. The more valuable and rare the right resources are in the right places, the more likely the firm may have a long-term advantage over its competition.

The diagram below helps us to think in simple terms where to invest resources.

A firm utilizes its resources and capabilities to create a competitive advantage. The organization’s resources and capabilities combined together constitute its distinctive competencies.

There are two types of competitive advantage:

• Cost Advantage: A cost advantage exists when a company is able to deliver the same benefits as their competitors but at a lower price
• Differentiation Advantage: A differentiation advantage exists when a firm is able to deliver benefits that surpass their competitors

Amazon successfully identified the right resources and developed its capabilities in key target areas. These investments resulted in:

• Sophisticated online retailing technologies
• Personalization features for customers on its websites
• Reliable and easily scalable IT systems all one platform
• New products (100 different products in seven major geographic markets)
• Top customer relationship system
• State of the art warehousing
• New products (100 different products in seven major geographic markets)

Amazon's financial analysis is multi-faceted and comprehensive.  At a macro-level, its reviews include an analysis of: 

• Revenue to cost of sales overtime
• Revenue and retained profits
• Gearing, Debt and Capital Structure

Amazon’s investments are paying off. Their net sales continue to grow, their cost of goods decreases as a % of sales and their net income continues to increase. And, they continue to invest in initiatives that provide them a longer-term competitive advantage

Highlights by David Willden