Amazon’s Vertical Integration

Jeff Bezos, The owner of Amazon has become the world’s richest person with a net worth of over $100 billion. This can be attributed to the extremely fast growth in the share value of Amazon. One of the premier reasons behind this fast growth is vertical integration. Amazon has been taking vertical integration to a whole new level. The operational model of Amazon is to do vertical integration using its scale. First Amazon starts using the services itself. Over a period of time, Amazon builds operational efficiencies in these services. Once these services have a competitive advantage over similar other services, Amazon offers them to other corporations and users. This model has been wildly successful and has been instrumental in making Amazon the giant that it is today.

In this article, we will have a closer look at some of the successful vertical integration forays that Amazon has got into.

Warehouses

When Amazon started its business, it wanted to be an asset-light company. Bezos was of the opinion that he would simply pass on the orders from the customers to the publishers. However, he soon realized that the order fulfillment and customer service was weak. As a result, Amazon had to create its own warehouses. Jeff Bezos has invested a lot of time and money in making Amazon’s warehouses the most efficient ones. Today, these warehouses are largely run by using technology like robotics process automation. These warehouses offer the lowest cost amongst their competitors. Once Amazon was sure that it could take on competition, it started offering the service to other companies. Since then, Amazon’s warehousing, as well as picking and packing services, have been a major hit amongst the smaller corporations who are trying to benefit from the economies of scale that Amazon has.

Amazon Web Services

Amazon has also developed one of the best cloud computing ecosystems. Amazon’s business model has traditionally relied on the use of computing technology to gain better insights into customer behavior. As a result, Amazon acquired a lot of storage space, databases and created other applications for its own use. However, these applications were built in such a way that they could be offered to other smaller businesses as well. Small e-commerce businesses do not have to reinvent the wheel when they start their business. They can use the AWS platform and build their applications. They do not have to pay for setting up the infrastructure which can be expensive. Given the fact that startups are usually short of cash this arrangement works out perfectly for all the parties involved.

This was the beginning of Amazon web services which is one of the most successful cloud-based platforms across the world. Amazon not only achieved technical dominance in its field but also used the revenues from other services to fund this endeavor.

Delivery Services

Amazon has recently announced its intention to launch its delivery business. This has sent the shares of companies like UPS and FedEx into a tizzy. After all, Amazon is the master of innovation. It has been working on technologies like drone deliveries to reduce the cost of its operations. It is also known to be experimenting with other technologies such as in-house deliveries. On the other hand, companies like UPS have massive unions. The workers there are opposed to any kind of technological advancement. They believe that the increase in operational efficiency will lead to job loss and redundancy.

Once again, Amazon has the strength to give its logistics business the initial push. Once this business becomes more efficient than others, Amazon is likely to offer delivery services to third-party customers. This is of vital importance because in the logistics business volume is everything. Volumes build efficiencies and these efficiencies help Amazon reduce the cost of its operations and provide better services to its customers.

Banking Services

Amazon recently launched its debit cards in countries like Mexico. This is because the website is based on an e-commerce model. Hence, transactions have to be routed electronically. However, most people in Mexico do not have debit or credit cards to carry on these transactions. In order to tap these customers, Amazon has announced the launch of a debit card which can be recharged from local stores. Customers can use it to make purchases at certain brick and mortar stores. They can also withdraw cash from ATM’s, if they want to do so.

Once again, Amazon is not relying on banks or other companies to build the infrastructure. It is going the additional mile to enable customers in developing countries to make online transactions. Amazon is not only building the requisite infrastructure but is also playing an instrumental role in changing the consumer’s mindset. Once these customers start transacting online, Amazon will charge other companies to use the service.

To sum it up, Amazon has become the master of vertical integration for online companies. When internet businesses started thriving, there was considerable ambiguity as to whether they will be able to achieve vertical integration. Amazon has certainly shown the way. It is on the way to becoming one of the most vertically integrated companies in the world.


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The article is Written By “Prachi Juneja” and Reviewed By Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.


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