Strategic Capabilities and VRIO Criteria
Discuss About The Organizational Survival In The Internet Age.
Strategic capabilities as defined by Johnson et al. (2014, p.50) are “the capabilities of an organisation that contribute to its long-term survival or competitive advantage”. The two components that make up strategic capabilities are resources and competences. Resources are the assets that organisations have or can call upon and competences are the ways assets are used or deployed effectively (Johnson et al. 2014, p. 50). It is vital that businesses such as Amazon Australia not only have appropriate resources that contribute to strategic capability but to also use these resources in an effective manner. To ensure long-term success however, strategic capabilities need to be dynamic capabilities, that is, an organisation’s needs to be able to change and adapt their strategic capabilities to meet the needs of changing environments (Johnson et al. 2014, p. 51). There are four criteria by which capabilities can be assessed in terms of providing a basis for competitive advantage: value, rarity, inimitability and organisation support – or VRIO.
A company must have specific resources they can call upon to gain a competitive advantage. Amazon Australia ensure they have the latest and most advanced technology in the industry. This allows them to innovate a lot of their own products and services, which helps reduce costs and increase revenue, giving them an advantage over their competitors. This is because it can be difficult and rare for other competitors to create their own products and services the way Amazon Australia does.The company already has a distribution centre in Dandenong South, in Melbourne and are also set to launch a new 43,000-square metre fulfilment centre in the Goodman Centenary Distribution Centre in mid-2018 (Hatch 2018). The new centre combined with the existing centre will lead to an increase in their product range and will allow them to support more third-party sellers who use their fulfilment service. Their extensive product range also gives them an advantage over competitors in retail such as JB Hi-Fi who only sell a limited range of products, and this could prove difficult for JB Hi-Fi to imitate Amazon Australia’s product range as it creates extensive holding costs. In order for retailers such as JB Hi-Fi to gain market share and profit, they would have to adopt a penetration pricing strategy, which could significantly impact profit margins in the short term. Their online presence-only system also gives them advantage over retailers, as it reduces their utility expenses and therefore can afford to lower their prices on their products, assisting in achieving economies of scale and adding value for customers, therefore giving them a competitive advantage. Their highly skilled staff allow them to move efficiently and effectively as it is their model to process and deliver orders quickly, which reduces lead times, leading to higher customer satisfaction and retention rates. Their leading technology, such as product scanners and packaging technology, also creates a competitive advantage as it also assists in reducing lead times.
Amazon Australia’s Strategic Capabilities and Competencies
Amazon Australia’s business systems is one of the leading systems in the world which has enabled them to attract 11.4 million visits in Australia in March 2018 (Mitchelson 2018). They understand what activities they need undertake that are especially important in creating value and which are not. These essential activities are what’s used to create the value chain (Johnson et al. 2014, p. 60). Their buying process is well-known for its speed, accuracy and reliability which is a reason for their consistent customer retention. The buying process, which involves mostly operations and logistics, requires customers to access their website, of which then changes each time based on a customer’s previous searches and products purchased. This creates a unique experience with a personalised layout for nearly every individual (Investopedia 2018). Once a product is purchased, Amazon’s system begins to work. Orders from third-parties are received by Amazon, and these third-parties take a percentage of those sales(Investopedia 2018). However, most orders are processed through the warehouse. These warehouses, such as the centre in Melbourne, are stocked based on algorithms that predict the types and number of products being in ordered in the region (Investopedia 2018). And its these algorithms and fulfillment centres that create an advantage over other online retailers, such as Myer and Kmart, as it allows the company to deliver orders quickly and offer cheaper prices to customers on a consistent basis (Investopedia 2018).It is these support activities through their technology that improve the effectiveness of their primary activities (Johnson et al. 2014, p. 61). Their internal complexity is what delivers customer value, and would prove difficult for other retailers to imitate.After the product has been processed and packaged, it is then placed in a delivery truck, depending on the shipping option. This process takes just minutes from the final order confirmation before its placed in delivery assets (Investopedia 2018). This entire process creates value for customers, their processing and delivery speed is rare of which little to no competitors can match, their algorithms and fulfillment centres are difficult and costly for competitors to imitate, and the company is organised effectively so that they can carry these processes quickly and efficiently (Investopedia 2018). The combination of all these competences allows them to achieve economies of scale, and maintain as well as gain market share over competitors, leading to increased profits.
The analysis of the macro-environmental trends that affect Amazon is performed by choosing any two factors of the PESTEL framework. This includes the political and economic factors:
Analysis of Macro-Environmental Factors for Amazon Australia
Australia is known as a safe economy for investment since the regulatory and political environment of the countryis progressive and stable, which provides more certainty and confidence for investors (Chaffey and Ellis-Chadwick 2016). Australia’s strong history as a safe investment destination has proven quite effective in the face of policy direction and the economic challenges. Changes in government policy in response to thechanges in the economy represents the effectiveness and transparency of the government. The transparency, openness, efficiency, a strong legal system, makes the country an important asset for the Multinational Corporations (MNCs) in the Asia Pacific region. The political scenarios in Australia thus, pose little to no threat to e-retailers like Amazon Australia. Hence, the political stability of the country also leads to the economic stability, and in turn, could positivelyimpact growth for Amazon Australia.
Australia’s services sector represents about 70% of total GDP in Australia (DFAT 2018). The economic growth is primarily dependent on the agricultural and the mining sectors. The country ranks tenth in the ease of doing business index for both normal retailers and the e-retailers like Amazon (Sarbah and Otu-Nyarko2014). Australia has many key factors that attract business that include:
- Presence of an index that eases the doing of business
- Stable and constant economic growth
- Low unemployment rate
- Constant and stable inflation
- Stable and strong financial system
There is a strong correlation between economic factors, ad revenue and profits produced by businesses such as Amazon Australia as it is significantly dependent on the state of a national economy (Anthony 2018). During recessions, economic activity decreases in conjunction with revenue and profits of e- businesses and vice versa. Likewise, higher rates of economic activity should lead to faster growth and higher amount of revenue for Amazon. Although consumers may be less likely to spend during a downturn, they will likely turn to Amazon Australia due to lower prices if consumers do decide to spend money.
Porter’s Five Forces assists in analysing Amazon Australia as it indicates how various forces helps in shaping the competition of retail industry and the position of the company with respect to the forces (Dobbs 2014). Thus, the model represents a framework for determining the competition of the business. The model also derives forces based on the industrial organization economics that helps in determining competitive intensity and the attractiveness of the industry in terms of the profitability.
The bargaining power of the suppliers of Amazon Australia ranges is low. This is due to Amazon’s upper hand in the supply chain. The number of the suppliers in Amazon is big and they have to do business as per the rules set by the company. Thus, the suppliers have to follow code of conduct put forward by Amazon (Mitchell 2018). The core areas taken into account by Amazon Australia in terms of the suppliers include:
- The right of legal benefits and wages
- Maintaining safety and health in the production areas and in any living quarters
- Maintenance of the appropriate working hours along with overtime pay
- Prevention of the forced labor or the child labor
- Ethical and fair treatment that also includes discrimination (Nguyen 2013)
Porter’s Five Forces Analysis for Amazon Australia
Further, the suppliers need to pursue the standards of the supply chain put forward by Amazon Australia. In addition, the company also makes forward integration difficult for the suppliers (Mantin Krishnan and Dhar 2014). Nevertheless, Amazon can make an easy switch or find newer suppliers. There are several options for any product of the company. Based on such factors the bargaining power of the suppliers is low. The suppliers have lower bargaining power due to the availability of the substantial number of the suppliers and the wider span of the distribution network. Thus, the online retailers can easily make a switch towards a different supplier for better quality and lower prices. Moreover, the bargaining power of the suppliers is low for Amazon since it does not involve the need for the payment until thirty-five days of confirmation of the sales.
Amazon Australia’s consumers have a medium bargaining power that ranges. The company stresses more on the product quality and customer satisfaction. The customers of Amazon have a lower switching cost along with the company having higher level of competitors over the years (Rothaermel 2015). The company also faces the pressure of the physical retailers. Moreover, each customer has sufficient online information about the products searched in their language medium that allows them to make a choice in terms of the information available. The website of Amazon is available in English, French, German and many more. This is why retention of customers remains a major focus area for e retailers Amazon where the buyers have a higher bargaining power.
With increasing number of brands entering the online retail, the threat of substitutes for Amazon Australia is medium because the consumers prefers Amazon and is even willing to pay more for the better service even when the prices are higher. The competitive advantage of the company however lies in the outstanding customer service besides the brand name. Nevertheless, the customers can make an easy switch between the brands.
Amazon Australia has a lower threat of newer entrants due to the propagation of the digital technology that initiated various changes to retail industry. There has been an entry of a larger number of e-retail that made easier building of the model for e retail with available resources of the technology (Christensen 2013). Emergence of several national and international brands like the Flipkart and e-bay has put up competition with the Amazon Australia. Amazon also faces challenges in terms of the other expenses like the utility and the construction expenses at the initial stages. The company also prepares the stage for price war by offering price cuts for its products.
Hence, the growth of the digital technology helps in reducing the entry barriers. Building a brand like Amazon seems difficult due to marketing and other expenses. In addition, various strategic factors require certain amount of dedication for building a brand.
The level of the rivalry faced by Amazon in quite higher since there has been a growth in the number of players in e-retail along with an immense amount of competition put across by the traditional retailer brands (Benghozi 2016). For instance, Wesfarmers and Coles are the key competitors of Amazon, the e-retail giant, in Australia. Other factors intensify the rivalry between the retailers. However, it is not just bigger brands but also the smaller ones that fight for the market share thereby leading to the creation of the competitive pressure. Some bigger non-Australian brand has entered the Australian market while others stand in the pipeline waiting for their entry and fast expansion. Therefore, Amazon Australia will face an increasing unimaginable competition with the passage of time that lead to decrease in the market share and lowering of the profits.
The business strategy adopted by Amazon Australia is described as cost leadership, taken to the extreme (Bharadwaj et al. 2013). The business strategy of Amazon depends on four principles that includes an obsession for customers instead of competitors, obsession for innovation, commitment towards the operational excellence and the long term thought process of the company. The strategies we recommend for Amazon Australia are as follows:
- Diversification
Diversification involves enlarging or varying its range of products or field of operations. Diversification reduces risk within markets as it allows for greater negotiating powers with suppliers, and it also provides revenue in certain areas where other revenue areas may be low. However, its primary objective is for growth (Raphan and Friedman 2014). It is recommended for Amazon Australia to diversify through verticalintegration. They can do this by backwardly integrating into business that supply the products they sell (Johnson et al. 2014, p.138). This will create value as it reduces costs, increases revenue, builds barriers to entry and it can achieve approved scheduling, which in effect lead to a competitive (Johnson et al. 2014, p. 138). Additionally, Amazon Australia can further diversify their product range and offer products that other retailers don’t. This will not only create more value for customers and gain a competitive advantage but it will reduce bargaining power of consumers and increase bargaining power over the suppliers that provide these new products. Horizontal integration can be another strategy used. Acquiring a similar business at the same level of the supply chain, can lead to an increase in market share over competitors. Furthermore, it also reduces bargaining power of suppliers as Amazon Australia would have more leverage to negotiate prices. This in turn, allows Amazon Australia to lower their prices further to gain more market share and gain a competitive advantage, which creates more value for customers.
- Outsourcing
For areas that may be too time consuming and costly for Amazon Australia, it is recommended to outsource these activities.Since Amazon Australia is highly focused on customer relations, it could be difficult to manage their large inventory at the same time. Amazon’s inventory management has been proven to provide invaluable trust from its customers (Charania 2014). The same can be applied for Amazon Australia as the operations and logistics are extremely similar.
Leadership strategies: Amazon gains competitive advantageby gainingthe contribution of the human resources. The company has fourteen principles including the one involving customer obsession and increased insistence on the maintenance of highest value that plays a vital role in increasing the inputs from the human resources.
The business level strategic direction adopted by Amazon Australia in positioning itself above its direct competitors is good due to the following reasons:
Market Development: It is recommended that Amazon Australia makes use of the market developmentas a key intensive strategy for growth. The company can offer existing products to new markets such as new users or geographies (Cassar, Grosjeanand Whitt 2013). Amazon Australia can now distribute to geographies that extend beyond the capability of Amazon America. The company considers each new market since it helps in the creation of the growth opportunities for the firm. The porter’s generic strategy helps Amazon in building competitive advantage that allows it in implementing the intensive strategy for market development. The strategic objective for the intensive growth strategy of Amazon would be the establishment of the newer retail online websites that corresponds to the market allowing it to gain competitive advantage.
Strategy of Market Penetration: This strategy is recommended because it helps in generating more revenue from markets where it operates currently (Bennett 2018). Increasing consumerism drives the growth of the company. For example, the increasing interest of the consumers in the online retail benefits the company with increased revenue of sales thereby enhancing the popularity of Amazon. Market penetration is responsible for the rapid initial growth of Amazon in Australian market. The generic strategy of Amazon leads to the creation of competitive advantage required for penetrating the market revolving around low prices and cost. Thus, the strategic objective based on this particular strategy reflects on the implementation of an aggressive campaign for attracting more consumers to the e-commerce website of Amazon thereby giving it an edge over the competitors.
Strategy for Product Development: It is recommended that Amazon Australia continue to innovate their own branded products and services. Risks associated with this include creating new strategic capabilities and project management risk.Amazon Australia currently innovates more of their own products than any other competitor (Crawley, Cameron and Selva 2015). The overarching goal of this growth intensive strategy is to increase revenue, but it also reduces costs and creates a competitive advantage.For instance, the company can offernew web services and basics products under its brand name. The generic strategy of the company provides support to this strategy by aiding the company with lower cost business processes for introducing newer products. The strategic objective for this growth strategy lies in increasing the investment in research and development for the rapid development of productsto release in the online market. This, in effect, provides an edge over the competitors.
Conclusion
Amazon Australia has already proven to be a huge success, showing more website visits than competitors since December (Mitchelson 2018). This is due to their effective resources and us of these resources, as well as how well they manage their operations and logistics. To continue to succeed within the current political and economic environment in Australia, it is important for them to continue to diversify their product range, innovate their products, outsource areas that require specialisation and to try new markets with existing products as well as to create new products for existing markets. Doing this will enable to create more value for customers and an advantage over competitors.
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