Amazon Strategy

The company, now known as Amazon, was founded in 1994 by Jeff Bezos and was then called Cadabra. The name was unsuccessful because it resembled the word “ cadaver ”, so a year later it was replaced by Amazon. The firm was named after the world’s largest river, the Amazon, as Jeff Bezos set out to make his company the largest in the world. Also, the name sounded resounding and memorable. After all, in the online business, as Jeff Bezos said at the time, the name means much more than in the real world. It turned out that the company Amazon for the first time in a long time showed a significant profit. The profit for the specified period became the highest for the whole 22-year history of the company and reached 513 million dollars. For comparison, losses for the same period last year amounted to 57 million US dollars, and in general, the last five years in this regard were not the most successful for the company. Despite the fact that Amazon more often showed losses than profits, investors give it much greater freedom of action than other companies in this market segment.

Strategy

Strategic issues and recommendations

Amazon is the largest online trading platform in the world and one of the most popular Internet sites. Through it 3 million sellers work, here are placed 350 million different goods. Amazon is responsible for 4 million deliveries per day. To cope with such a flow of applications, the company - mostly in warehouses - employs 270,000 employees. This is four times more than that of all Google (Kwansa, Mayo & Demirciftci, 2008).

That no worker wasted time, the company developed a considerable control system, subject to strict algorithms. At the head of all computer systems that calculate what each person should do. Amazon several times fined for excessive rigidity to their employees, its work on wear and tear (well, or for those who want to lose weight very sharply). The company very much does not like to share its secrets and disclose the algorithms that operate all of its 90 giant warehouses, the ”Executive Centers.” But we in Pochtoy take hundreds of orders from them every day, and still, something interesting about them was found out (Kwansa, Mayo & Demirciftci, 2008).

Each executive center of Amazon occupies 50-60 thousand square meters. It’s about eight football fields. Space is well lit, but there are almost no sounds around, despite the presence of more than two thousand people. Only the hum of the conveyor belts and the hum of the footsteps of the employees following the regular goods are heard (Kwansa, Mayo & Demirciftci, 2008). They silently collect orders, silently glue boxes. Everyone is focused on their business; there is no talk. The system monitors the effectiveness of a person, and if it does not fit into the standard, it is immediately fined or fired. Therefore, no one can afford to spend an extra second (Morden, 2007).

New workers should not learn departments with goods. They are just not here. Each product is put where there is space. Infinite rows of shelves resemble a supermarket or library. The book can lie next to the plane, iPhone - near the jeans. A person cannot understand this logic (Morden, 2007).

The system operates on barcodes, which are stored in the database of the warehouse. Each new product receives its code and is sent to that cell, which is free and is located to it as close as possible. And when the site comes to order, and the goods must be taken away, the nearest free worker on the display of his scanner ”gun” shows the number of the row and shelf. When an employee arrives at the site, it remains to read the barcode again to confirm that no error has occurred. And then immediately on the scanner, the next target lights up - with the address of the cell and the expected time for which it is necessary to have time to take the goods. Sometimes this ”target time” is 5-10 seconds (Kwansa, Mayo & Demirciftci, 2008). And your boss will see if you do not have time (Morden, 2007).

The flow is big, and the trust to employees is zero. At the entrance to the warehouse, you must leave everything, including the phone, in your locker. You get a retro-reflective uniform without pockets and a hand-held scanner-a ”gun.” Besides him, you can carry only a bottle of water and a transparent bag for money - to buy food in the dining room. In a separate room in front of the monitors is a security team that tracks the movements of all employees through their scanner. Such a system, probably, would use security in a high-tech prison. If a person goes somewhere or lingers for a long time in one place, a manager is sent to him to assess the situation. And on the way out - another check, like at the airport, to rule out cases of theft.

No, this is not Google for you. Amazon is also not among the best employers in the USA. But the system gives a result. Conveyor belts move so fast that, for example, the ”Executive Center” in Kentucky can handle 400 orders in one second. A truck with parcels leaves the warehouse every two minutes. There is no such efficient system in the world for anyone. The human factor is almost entirely excluded, algorithms control all.

Manufacturers send their products to ”Amazon,” and the company distributes them through its network of warehouses. This takes into account the previous history of orders, and if a region, say, especially likes to buy sneakers, it increases the likelihood that a new shipment will be sent there (Kwansa, Mayo & Demirciftci, 2008).

The process of receiving goods is almost as important as sending it. Workers open boxes in trucks, get things out of them, put a marker on them and shift them into baskets for transportation. Conveyor lines deliver these baskets to different parts of the warehouse, where other workers unload them, put them on the shelf, scan the product itself and scan the barcode of the cell in which it will be stored. From now on, the Amazon system will know where this item is sitting. More such information is not present to anybody. For many here, there is complete chaos and confusion (Morden, 2007).

Shelves are divided into small sections, and things in them are stored, like books in the library. Each cell has a barcode and an alphanumeric code (for example, P-1 A526 770 8: section, row, the number in the row, the order of the cell from the floor). The cell code does not say anything about its contents. Goods are evenly distributed throughout the warehouse so that employees do not have to go long. The rule is only one: two identical products cannot sit in neighboring cells, so that here also to minimize the human factor (Morden, 2007).

When you order something on the site, the ”Amazon” system quickly understands where such a product is located in the closest warehouse to you and identifies the employee who is currently walking near this cell. He has information on the scanner on which to go. In the warehouse, there is an entire army of such “collectors,” in complete silence moving from object to object. For a day each of them must find, scan and carry to the conveyor a minimum of one thousand products (Dogan, 2015).

On the conveyors, the cargo is delivered to one of the packing stations. Workers place goods on high shelves on wheels. It is here that different goods of the same order are collected together. Each slot on the shelf is its separate order. Then the shelves roll to the place of packing, and the contents of the slots are ”tampered” into suitable cardboard boxes known to anyone who has ever ordered anything from ”Amazon” (Hill & Jones, 2012).

At this stage, the algorithms again force people to work at the peak of power. The computer screen shows the optimal size of the box for each order - and the time for which it should be packed from the side rolls out with air, playing the role of pillows and softening the delivery, and tape, which all this business should be glued together. The assembly of one order usually takes thirty seconds. Hundreds of people work at a speed that we typically see only from the Chinese in the untwisted youtube video.

The difference with the Chinese is that employees in factories in the Middle Kingdom give bonuses for over fulfillment of the plan, and employees of the Amazon warehouse are only fined for delays. Because of this tough approach, which journalists in the US called ”a paradise for the client, hell for the employee,” the staff turnover is very large. On average, they can withstand 12 months. At Amazon in this plan, the second (from the end) results in the list Fortune 500 (Hill & Jones, 2012).

Just for interest: in Microsoft, staff on statistics are four years, in Xerox - 7, two years. eBay and Yahoo! Only two years and worst of all known companies is the case with Google of the search engine on average leave after 14 months. But these are highly paid professionals who have gone on to increase or enter the start-up. Out of the ”Amazon,” slightly different people leave with different perspectives and a different level of pay (Aaker, 2011).

Packed boxes are sent on one more conveyor to the machine that puts the marking and postal stickers. Then, stamped, orders go down to a large concrete basement, wait for loading. Hence, they are transported by FedEx, UPS, other mail/logistics companies and Amazon itself.

So far, the algorithms for optimal ”packing” of parcels in a truck retailer have not yet come up - and, perhaps, it loses a couple of percent on this, if not all leaders in their childhood loved Tetris. But the firm compensates for this thanks to a powerful separate system analyzing the best route and method of delivery for each product. Saving gasoline per year results in millions of dollars, and the parcel comes to the buyer for several hours, and even a few days earlier. The firm claims that on its three busiest days in 2016 - on Black Friday, Cyber ​​Monday and the first Monday in December, it delivered 99.9% of orders in the terms stated on the site.

In the US, delivery of many products is free. In America - you have to pay, and often quite a lot of money. Amazon does not do this (in fact, some of the goods are delivered, but for fabulous money), so the parcel goes typically through one of the intermediaries. Payment directly depends on the weight of the products (Aaker, 2011).

To further accelerate the delivery and reduce commission for them, removing the monopolists from the market, in April 2017 the company launched the transportation by air in America, already running giant aircraft with the brand livery Prime Air. At its fleet, including Boeing 767 and drones, Amazon is going to spend $ 1.5 billion.

In 2009, Jeff Bezos, the founder and head of Amazon, wrote a letter to the company’s shareholders, declaring war on Muda. This is a Japanese term meaning ”uselessness,” ”loss” or “waste,” which was first used by Toyota. For Amazon, this meant that everything that could be done should work as efficiently as possible. The statistics of the company, for example, shows that the acceleration of page loading by 1/10 seconds - leads to an increase in consumer activity by 1%. For Amazon, it’s billions of ”bonus” dollars. Delays in delivery are also unacceptable, even if it is a couple of hours. The company in this regard, you can say, a fad.

The use of drones for delivery in cities has not yet been authorized, and speed limits apply on the roads for cars. Therefore, almost the only way to significantly speed delivery - continue to optimize the work of ”collectors” in the warehouse (Dogan, 2015).

And there is something to optimize, even in spite of the fact that they find the goods with their scanners-rifles in seconds. The main problem that Amazon defined for itself is the human factor. First, according to the requirements, workers should be able to rise to 22 kg and spend 10-12 hours on their legs. For the change, they pass 12-20 kilometers between the regiments. Errors in this mode are almost guaranteed. And if someone cannot lift something, or if a person suddenly confuses a row/ shelf/cell number, this is another slowdown. 

Therefore, warehouses of ”Amazon” are actively robotized. In 2012, the company bought a robot manufacturer Kiva Systems for $ 775 million. Now in the stores of the store, there are about 40 thousand of their machines, similar to large orange rumba. Ideally, such robots will choose the right product and deliver it to the truck, but so far they have a simpler task. The mobile shelf is placed on top of the robot. And when the goods in one of the cells become necessary to the buyer, the robot itself delivers the regiment to the person. It turns out much more efficiently: people do not have to run, they make fewer mistakes. The robot does not get tired; it can work indefinitely and move any weight. A bunch of automatic and human brain power is proving to be the most productive. But the technology of the Amazon Robotics department continues to improve, and, perhaps, shortly, two hundred thousand American ”collectors” and ”packers” will have to look for a new job. And the automatic drones of Amazon, delivering goods to the house, are called to replace drivers of trucks soon (Dogan, 2015). The man is the only superfluous link in the perfectly tuned machine of the Internet giant.  The developed infrastructure and huge scale allow ”Amazon” to keep the minimum prices. In some categories of goods, the retailer works at a loss, only to not give in to competitors. Prices on the site are usually one and a half to two times lower than American prices (without jokes).

Strategic Issues

Amazon Corporation consists of many segments that work independently of each other. Some of them are known in the market and bring a good profit. Others - start-ups and, like all start-ups, require significant investment with little income. Finally, a significant part of the revenue is fees and commissions from goods and services that are provided by third-party companies for which Amazon is only a platform (Dogan, 2015). So, the growth of gross income does not give direct information about the change in consumer prices and the margin of the Amazon itself. The graph reflects only the dynamics of the sum of all the factors listed above. Perhaps the ratio of free (FCF) and operational (OCF) cash flows will help better understand why net income remains low (Morden, 2007).

Amazon primarily pays attention to free cash flow. But let’s look at the chart of operating cash flow. Operating cash flow is nothing more than the company’s income from doing business minus operating expenses. If we take away the capital costs (CAPEX) from the resulting value, we will get free cash flow. This means that all additional funds raised are invested in capital expenditures or, in other words, the growth and development of the corporation. That is for the period from 2011 to 2013 in the development of business was invested more than $ 5 billion (Dogan, 2015).

This was also said by Jeff Bezos himself when he portrayed the activities of his company in the form of a diagram, placed at the beginning of this article. Please note that there is no arrow in the diagram in the direction of the item ”earning an income.” The movement of capital in Amazon is a closed cycle, supporting continuous growth and development. Amazon was among the first companies in its segment to start developing their products. The Kindle e-book reader first appeared on sale in 2007 (Aaker, 2011). The first batch of devices was sold for 5.5 hours. Now the seventh generation Kindle is the best-selling device for reading among e-books. Kindle is by no means the only and not the most famous undertaking of the company. In 2006, the Amazon Web Services (AWS) project was launched. In the beginning, it was only a data store of up to 5 terabytes in size. Now it includes more than 50 services, from file hosting, distributed data warehouses, virtual server leases and provision of processing power to business intelligence. AWS operates in 33 different zones in 12 regions of the world; Next year, 11 additional access zones and five new regions will be added. Data Center Amazon in Northern Virginia is one of the ten largest “cloud” data centers in the world. Among customers, both start-ups and the world are most famous brands - Netflix, Adobe, Siemens, Vodafone, and others. Thanks mainly to cloud services, the company also showed such a high profit in the last quarter (Hill & Jones, 2012). 

Amazon’s services are not limited to the sale of consumer products and cloud services. In 2007, Amazon launched its music store in MP3 format. And in 2013m there was an AutoRip service, which began to provide customers with free MP3-copies of the CDs they bought. Amazon Appstore for devices on the Android platform was opened in 2011 and is now available in more than 200 countries. In October 2008, Amazon began working with the game developer, Reflexive Entertainment, and in November 2012, already released its first mobile game, Air Patriots. The originals of works of art appeared on Amazon in August 2013, when the Amazon Arts service was launched. Art lovers are offered more than 4000 items of art objects, including, for example, the work ”L’Enfant a la tasse” by Claude Monet worth 1.45 million dollars (Dogan, 2015). Separately it is worth noting that not all start-ups of Amazon are equally successful.

For the convenience of customers Amazon today accepts almost all types of credit and debit cards, and also cooperates with many payment systems. However, the team of the Internet giant is trying to outpace the market, and now, Amazon is already preparing to introduce its face recognition system for user verification. A new payment system will allow users to instantly pay for purchases and surpass the famous ”1-click” payment system. Amazon received a patent for a biometric recognition system, where a wink will confirm online payment (Hill & Jones, 2012).

So, Amazon is constantly developing, creating and acquiring new types of business, introducing new technologies, acting as a platform for other businesses (be it e-commerce, logistics, and warehouses, fulfillment or cloud services). The vast majority of earned money is immediately invested in development (Aaker, 2011). Let the net profit comparative is small; shareholders see the growth of business and market share, as well as a very solid and constantly growing cash flow. Today, Amazon occupies about 1% of the US market. Should he stop developing new projects and explore new markets and, instead, get a well-deserved profit? Perhaps he should leave some segments, leaving them for other companies? Jeff Bezos’s view on this issue is very clear: you need to continue investing because withdrawing money from business means missing out on new opportunities. 

References

Kwansa, F. A., Mayo, C., & Demirciftci, T. (2008). Handbook of Hospitality Strategic Management. Handbook of Hospitality Strategic Management. https://doi.org/10.1016/B978-0-08-045079-7.00008-9

Aaker, D. A. (2011). Strategic Market Management. Ansoff HI New York, (613), 341. https://doi.org/978-0-470-68975-2

Hill, C. W. L., & Jones, G. (2012). Essentials of Strategic Management. International Journal of Project Management (Vol. 18). https://doi.org/10.1016/S0263-7863(98)00076-3

Morden, T. (2007). Principles of Strategic Management. Ashgate Publishing Limited.

Dogan, N. (2015). The Intersection of Entrepreneurship and Strategic Management: Strategic Entrepreneurship. Procedia - Social and Behavioral Sciences, 195, 1288–1294. https://doi.org/10.1016/j.sbspro.2015.06.290