Global Expansion in response to competitive forces

In its 2017 SEC filing Amazon describes the environment for our products and
services as ‘intensely competitive’. It views its main current and potential
competitors as:

 1) online, offline, and multichannel retailers, publishers, vendors,

distributors, manufacturers, and producers of the products we offer and sell
to consumers and businesses;

 (2) publishers, producers, and distributors of physical, digital, and

interactive media of all types and all distribution channels;

 (3) web search engines, comparison shopping websites, social

networks, web portals, and other online and app-based means of
discovering, using, or acquiring goods and services, either directly or in
collaboration with other retailers;

 (4) companies that provide e-commerce services, including website

development, advertising, fulfillment, customer service, and payment
processing;

 (5) companies that provide fulfillment and logistics services for

themselves or for third parties, whether online or offline;

 (6) companies that provide information technology services or products,

including on- premises or cloud-based infrastructure and other services;
and

 (7) companies that design, manufacture, market, or sell consumer

electronics, telecommunication, and electronic devices.

It believes the main competitive factors in its market segments include

"selection, price, availability, convenience, information, discovery, brand
recognition, personalized services, accessibility, customer service, reliability,
speed of fulfillment, ease of use, and ability to adapt to changing conditions,
as well as our customers’ overall experience and trust in transactions with us
and facilitated by us on behalf of third-party sellers".
For services offered to business and individual sellers, additional competitive
factors include the quality of our services and tools, their ability to generate
sales for third parties we serve, and the speed of performance for our
services.

Draw implications and suggest recommendations for the firm’s managers

Amazon is hoping to boost its sales in Mexico and the neighboring countries. This is
done by overcoming the competition from other e-commerce industries that are
operating in the region. Online purchases comprise 3 percent of all the retail sales in the
country. Amazon is hoping to boost the popularity of online shopping among Mexican
customers. This could be a profitable venture, but duplicating its success style in the US
would be more robust.

Online shopping in the United States comprises over 10 percent of sales. Mexico would
be a convenient place for the company to expand because the country shares a 2,000-
mile long border. Moreover, the country is comprised of a large population of potential
customers.

Amazon is hoping to expand its product offerings in Mexico and ensure those
customers can enjoy faster deliveries. The move is also expected to inspire consumer
confidence by making the purchasing process secure and as smooth as possible.
According to the statistics from Euromonitor International, the company recorded sales
worth $253 million in Mexico. This was more than double the value that was posted in
the previous year. This explains why Amazon is willing to risk getting into the new
market in a big way as the move will be big and profitable in the end.

Amazon accomplishing its objectives will not consist of entirely smooth sailing. This is
because very few Mexican customers own credit cards, and many are wary that any
online dealing could be fraudulent. However, some analysts argue that the company is
ready to take this risk. This is because it is racing up to face fast-growing rival
companies in foreign markets such as Alibaba Group Holdings Ltd.

As Amazon.com grows larger, the sizes of their Oracle databases continue to grow, and so does the
sheer number of databases they maintain. This has caused growing pains related to backing up
legacy Oracle databases to tape and led to the consideration of alternate strategies including the
use of Cloud services of Amazon Web Services (AWS), a subsidiary of Amazon.com. Some of the
business challenges Amazon.com faced included:

 Utilization and capacity planning is complex, and time and capital expense budget are at a
premium. Significant capital expenditures were required over the years for tape hardware, data
center space for this hardware, and enterprise licensing fees for tape software. During that time,
managing tape infrastructure required highly skilled staff to spend time with setup, certification
and engineering archive planning instead of on higher value projects. And at the end of every
 fiscal year, projecting future capacity requirements required time consuming audits, forecasting,
and budgeting.

 The cost of backup software required to support multiple tape devices sneaks up on you.
Tape robots provide basic read/write capability, but in order to fully utilize them, you must invest
in proprietary tape backup software. For Amazon.com, the cost of the software had been high,
and added significantly to overall backup costs. The cost of this software was an ongoing
budgeting pain point, but one that was difficult to address as long as backups needed to be
written to tape devices.

 Maintaining reliable backups and being fast and efficient when retrieving data requires a lot
of time and effort with tape. When data needs to be durably stored on tape, multiple copies are
required. When everything is working correctly, and there is minimal contention for tape
resources, the tape robots and backup software can easily find the required data. However, if
there is a hardware failure, human intervention is necessary to restore from tape. Contention for
tape drives resulting from multiple users’ tape requests slows down restore processes even more.
This adds to the recovery time objective (RTO) and makes achieving it more challenging
compared to backing up to Cloud storage.

Emerging market MNCs expanding into developed markets with a strategic objective and
International Expansion by a firm to enter new markets for growth 600

What are these intensive growth strategies through which Amazon has reached such heights in the
world of online retailing?

1. Market Development

Amazon’s primary intensive growth strategy. The main objective in this first strategy focuses
on entry and growth in new markets. From the beginning, Amazon has kept expanding its borders
and it has never stopped adding new countries where it offers its services.
If at first, Amazon provided its online retail services to consumers in the United State, now the
company operates e-commerce websites in more than 10 countries, including Canada, the United
Kingdom, China and India. Every new country represents another growth opportunity for the
company.

2. Market Penetration

Amazon’s secondary intensive growth strategy. This strategy aims to generate more revenue from
markets where the company currently operates. Amazon is dependent on its consumers, which
is why when consumerism grows, the business by default grows. The company can benefit from
higher sales revenue, if they succeed in increasing consumers’ interest for online retail shopping. It
may sound daunting, but that might not be as hard to do nowadays, considering the popularity of the
Amazon brand.
A strategic objective based on this intensive growth strategy is to implement an aggressive
marketing campaign to attract more consumers to Amazon’s e-commerce website.
3. Product Development

Amazon’s third, supportive intensive strategy for business growth. The goal of this intensive growth
strategy is to develop and offer new products to gain higher revenues. The growth of Amazon
itself is partly influenced by the development of new products.
For instance, the company now offers AmazonBasics products and Amazon Web Services – AWS.
One strategic objective based on this intensive growth strategy is to increase research and
development investment, which can lead to rapid product development and quick release on the
online retail market.

4. Diversification

This is the final intensive growth strategy employed by Amazon. The objective in applying this
intensive strategy is growth based on new business. For instance, by acquiring Audible, a
producer of audiobooks and related products, Amazon managed to grow even more and expand its
influence in a new market segment.
This shows us that the company makes use of acquisition to implement this intensive growth
strategy. Growing the e-commerce business through an aggressive acquisition strategy is another
strategic objective associated with this final growth point.

These four intensive growth strategies are part of the reason why Amazon has risen above its
competition and has succeeded in becoming a worldwide leader in the online retailing space, staying
true to its vision statement:

“To be Earth’s most customer-centric company, where customers can find and
discover anything they might want to buy online.”

What Does This Mean for Other

Companies?
Amazon is currently the third-largest online retailer in Mexico. The company’s planned
move means that other companies should be ready to face stiff competition from the
American giant. Thus, they should come up with elaborate ways to enhance their
services to maintain their customers. The move should also worry Mexican companies
in some industries including the footwear and textile industries as Amazon would now
be able to make fast deliveries.

The move by Amazon is expected to create great shock waves in Mexico’s online retail
industry in 2018. The move is expected to get a boost if the talks favor it. The talks are
focusing on lifting the limit of the value of online purchases imported duty-free
incorporated into NAFTA. This will allow the company to reap big rewards after its plan
to move to Mexico as it will give it the edge over other fast-rising e-commerce
companies. However, the company is yet supposed to overcome the hurdles posed by
online retail challenges in the Mexican market. These include winning the confidence of
customers who are wary of fraud and encouraging more Mexicans to get credit cards.

Global sourcing for Innovation/R&D

The outsourcing of the R&D function is an emerging practice of corporate firms.

In their attempt to reduce the increasing cost of research and technology
development, firms are strategically outsourcing the R&D function or
repositioning their internal R&D organisation. By doing so, they are able to
benefit from other technology sources around the world. So far, there is only
limited research on how firms develop their R&D sourcing strategies and how
these strategies are implemented. This study aims to identify which
determinants contribute to the success of R&D sourcing strategies. The results
of our empirical research indicate that a clear vision of how to manage
innovation strategically on a corporate level is a determinant of an effective
R&D strategy. Moreover, our findings revealed that the R&D sourcing strategy
influences a firm’s sourcing capabilities. These sourcing capabilities need to be
developed to manage the demand as well as the supply of R&D services. The
alignment between the demand capabilities and the supply capabilities
contributes to the success of R&D sourcing

Outsourcing various activities to rationalize costs or enhance productivity

§Global sourcing for Innovation/R&D

R&D Outsourcing Strategy

1. 1. R&D Sourcing Strategy: increase effectiveness An Innovation Driven Procurement (IDP)
Service Capgemini Consulting is the strategy and transformation consulting brand Tags: of
Capgemini Group • Business Innovation • Procurement • Outsourcing • Business Model
Innovation • Open Innovation • Co-creation
2. 2. Outsourcing R&D requires a substantiated choice of the sourcing mode, as well as close
alignment of the business models with Suppliers & Partners Many companies source the
majority of their revenues from Suppliers and Partners. Outsourcing initiatives has been
increasing significantly over the years. Following the Situation Open Innovation concept,
companies have initiated co-creation with suppliers and partners. The next step is starting to
 outsource R&D. R&D is one of the most protected business functions in the large
companies. Driven by IP and risk management this is not something likely to be shared with
the outside Complication world. There is hardly any experience, leadership, culture, methods
and tools available in current organisations to really open up – let alone to outsource R&D
effectively. So how can companies outsource R&D (or at last a part of R&D) in order to
increase Question flexibility and effectiveness, whilst maintaining focus and dedication to the
value chain’s needs? Companies should assess the criticality of their innovation programs
and decide on the appropriate model of sourcing using the Global Sourcing of Services
(GSS) model. The GSS model is a decision support tool for the right sourcing strategy for
their Business Services and / or functions. Answer Once an outsourcing decision has been
made, suppliers/partners must be selected based on their ability and willingness to take over
(part of) R&D. The business models need careful alignment and for current
suppliers/partners, the change from contractor to developer will be substantial. 14/06/2010 2
3. 3. Open Innovation concepts can increase the effectiveness of R& Connecting with new
ventures inside Building scenarios of future markets with boundary spanning networks 
Creating flexibility in supplier segmentation and dependency 11,1%  Scouting for new
developments outside the existing 3,4% supply base and in completely different markets
14,3%  Ensuring influx of innovations from other value chains through suppliers Innovators
outperform the market  Provide toll gate services for new technologies throughout the
innovation funnel Value chain external mechanisms  Set up joint development programs,
co-creation, partnerships  Searching and stimulating new developments within the existing
supply base  Connecting existing suppliers with engineers  Allowing suppliers to leverage
innovations in other value chains for increased profitability D by the concept of “Spin IN and
Spin OUT” IDP based on Open innovation Value chain internal mechanisms & Changing
the market focus or future market Return to Shareholders Margin Growth Source graphic:
Prof Henry Chesbrough UC Berkeley, Open Innovation: Renewing Growth from Industrial
Routside the 0,4% product chain &D, 10th Annual Innovation Convergence, Minneapolis,
Sept 27, 2004 Source bar charts: S&P 1200 1995-2005 research 14-6-2010 3
4. 4. A trade-off must be made how to source a Research & The GSS model ranks the
different sourcing In-house Outsourced options based on attractiveness by Ownership
evaluating the R Eight different sourcing modes are defined Offshore varying in: Location -
Location (onshore or offshore) - Ownership (in-house or outsourced) Onshore Light -
Management Style (light or tight management) Management Tight Style  The Global
Sourcing of Services (GSS) model is a decision support tool which helps organisations to
define the right sourcing strategy for their services/functions. Development program, by
deciding on the optimal Ownership, Location and Management style &D program in scope,
the organisation and the environment 14-6-2010 4
5. 5. Each R& Each set of characteristics provides a unique insight into what the current
maturity and preferred sourcing strategy is for the RD program can be analysed by five
sets of Environmental Characteristics that affect the choice of the right Sourcing Mode &
Based on the outcome of the GSS model and the subsequent discussions, companies will be
able to determine their strategy based on research and best practices 14-6-2010 5
Together they form the basis of the sourcing strategy and will facilitate SOURCING
DECISION organisations to make these Customer Competitor sourcing decisions more
effectively Demand Characteristics Characteristics by providing a systematic approach to
diagnosing decision parameters Supply Market Characteristics D Organisation’s Service
program in scope Characteristics Characteristics
6. 6. Using the analytics of the GSS model we build a Realistic Future Positioning of the R&D
function of the company Example To-Be: Outsourced, Offshore and Tight The analysis of an
R&D program Management. Offshore can result in a change in Sourcing Supplier is seen as
(strategic) partner Mode. For any Sourcing Mode, there are two options with respect to
suppliers: Location 1. Develop the current supply base Onshore 2. Extend and/or change the
 current Light supply base Management As-Is: Tight Style In-house, Onshore and Tight In-
house Outsourced Management. Supplier is seen as Ownership contractor Analyzing the
R&D program can result in a different supplier relationship or Innovation Partnership 14-6-
2010 6
7. 7.  Simulation exercise If any of the four enablers is answered with “no”, the company should
decide whether to upgrade the current supplier/partner, or to source for a new or additional
supplier/partner 14-6-2010 7 Collective project  Experimentation  Support basis 
Communication  Management modes  Skills import  Emulation, Pride  Coaching 
Knowledge transfer conception  Participation to the  Training HOW TO DO IT? TO DO
IT?  Pressure / other functions constraints ABLE INTEREST TO DO IT? FOR THEM? DO
THEY DO THEY Levers KNOW WANT Levers  Interface with  IT systems ARE THEY IS
THERE AN development  Supplier  Dashboards modes and indicators  Remuneration 
Procedures  Evaluation system  Key processes  Power struggle objectives  Definition
of  Organization The Four Collaboration Enablers help a company to source the right
partner Levers Levers
8. 8.  Furthermore, the deal structure must fit Cost Structure PROFIT Revenue Streams the
cost and benefit drivers of both Financial Performance parties. The four enablers of
collaboration must be monitored continuously Source: Adapted from Alexander Osterwalder,
Business Model Generation 14-6-2010 8 This shift in capabilities must be Core Value
Value Distribution Customer Capabilities Configuration Proposition Channels Segment
managed carefully in order to prevent redundancies, or worse, gaps  As soon as the
company decides to move activities to the partner network (suppliers), core capabilities
within the Partner Network Customer Relationship company and supplier will need to shift 
The business model shows the relationships between the customer, the value offered to the
customer, and the organisational setup making it possible Resources Offer Customer Co-
creation Once the suitable sourcing mode and supplier/partner is defined, the Business
Models of the company and supplier/partner need to be synchronised

Foreign Direct Investment by a firm to access raw materials/labour for production

Factors affecting foreign direct investment

1. Wage rates

A major incentive for a multinational to invest abroad is to outsource labour intensive

production to countries with lower wages. If average wages in the US are $15 an hour,
but $1 an hour in the Indian sub-continent, costs can be reduced by outsourcing
production. This is why many Western firms have invested in clothing factories in the
Indian sub-continent.

 However, wage rates alone do not determine FDI, countries with high wage rates
can still attract higher tech investment. A firm may be reluctant to invest in Sub-Saharan
Africa because low wages are outweighed by other drawbacks, such as lack of
infrastructure and transport links.
2. Labour skills

Some industries require higher skilled labour, for example pharmaceuticals and
electronics. Therefore, multinationals will invest in those countries with a combination of
low wages, but high labour productivity and skills. For example, India has attracted
significant investment in call centres, because a high percentage of the population
speak English, but wages are low. This makes it an attractive place for outsourcing and
therefore attracts investment.

3. Tax rates

Large multinationals, such as Apple, Google and Microsoft have sought to invest in
countries with lower corporation tax rates. For example, Ireland has been successful in
attracting investment from Google and Microsoft. In fact it has been controversial
because Google has tried to funnel all profits through Ireland, despite having operations
in all European countries.

4. Transport and infrastructure

A key factor in the desirability of investment are the transport costs and levels of
infrastructure. A country may have low labour costs, but if there is then high transport
costs to get the goods onto the world market, this is a drawback. Countries with access
to the sea are at an advantage to landlocked countries, who will have higher costs to
ship goods.

5. Size of economy / potential for growth

Foreign direct investment is often targeted to selling goods directly to the country
involved in attracting the investment. Therefore, the size of the population and scope for
economic growth will be important for attracting investment. For example, Eastern
European countries, with a large population, e.g. Poland offers scope for new markets.
This may attract foreign car firms, e.g. Volkswagen, Fiat to invest and build factories in
Poland to sell to the growing consumer class. Small countries may be at a disadvantage
because it is not worth investing for a small population. China will be a target for foreign
investment as the new emerging Chinese middle class could have very strong demand
for the goods and services of multinationals.

6. Political stability / property rights

Foreign direct investment has an element of risk. Countries with an uncertain political
situation, will be a major disincentive. Also, economic crisis can discourage investment.
For example, the recent Russian economic crisis, combined with economic sanctions,
will be a major factor to discourage foreign investment. This is one reason why former
Communist countries in the East are keen to join the European Union. The EU is seen
as a signal of political and economic stability, which encourages foreign investment.

Related to political stability is the level of corruption and trust in institutions, especially
judiciary and the extent of law and order.
7. Commodities

One reason for foreign investment is the existence of commodities. This has been a
major reason for the growth in FDI within Africa – often by Chinese firms looking for a
secure supply of commodities.

8. Exchange rate

A weak exchange rate in the host country can attract more FDI because it will be
cheaper for the multinational to purchase assets. However, exchange rate volatility
could discourage investment.

9. Clustering effects

Foreign firms often are attracted to invest in similar areas to existing FDI. The reason is
that they can benefit from external economies of scale – growth of service industries
and transport links. Also, there will be greater confidence to invest in areas with a good
track record. Therefore, some countries can create a virtuous cycle of attracting
investment and then these initial investments attracting more. It is also sometimes
known as an agglomeration effect.

10. Access to free trade areas.

A significant factor for firms investing in Europe is access to EU Single market, which is
a free trade area but also has very low non-tariff barriers because of harmonisation of
rules, regulations and free movement of people. For example, UK post-Brexit is likely to
be less attractive to FDI, if it is outside the Single Market.

Evaluation

There are many different factors that determine foreign direct investment (FDI) and it is
hard to isolate individual factors, given there are many different variables. It also
depends on the type of industry. For example, with manufacturing FDI, low wage costs
tend to be the most important, as they are a labour intensive industry. For service sector
FDI, macro-economic stability and political openness tend to be more important.

Also, it depends on the source of FDI, American firms may value political openness
more than Chinese firms. Or American firms may have a preference for countries where
English is spoken more.