Business Perspective: Should Amazon Enter Smartphone Space Again?
Amazon is known to be a global giant with a presence across America and Asia and focuses on e-commerce, digital streaming, cloud computing, and artificial intelligence. Now, the question comes if an already diversified company needs to think about entering the smartphone industry? But, let me bring your attention to the infamous Amazon Fire Phone launched in 2014 by Amazon which was quite unsuccessful.
To decide upon the big question of launching a smartphone, let’s divide the problem statement into 3 sections which are important for the launch of a new product. The first pillar would be a company’s competencies/capabilities that could provide a competitive edge among customers. The analysis would lead to the decision of diversification or no diversification. The second pillar will determine the competitive environment in which Amazon would be entering. Higher barriers to entry would make the industry unattractive and low barriers to entry will make it attractive. The third pillar determines whether Amazon will be vertically integrating to launch a smartphone, or it should partner with existing suppliers.
We will start the discussion with the first pillar of decision making that is the core competencies of the company which will enable Amazon to have a competitive edge.
- VRIN Framework — The transformation of Amazon from bookseller to largest e-commerce player to leading cloud player has helped in creating a lot of valuable resources. VRIN framework talks about resources that Amazon has but that can’t be easily accessible or achievable for other companies in the same space. V stands for a valuable resource that creates value for the company, R stands for rare resources which are not very common with other competitors, I stands for inimitable which could be causal like work culture or unique like patents, or path-dependent or requires a lot of economic capacity, N stands for non-substitutability. Now evaluating Amazon on its resources using the VRIN framework we could come up with core competencies that could decide whether the diversification could be done or not.
As we all know, the brand name of Amazon is considered among the top 10 companies in the world with a market capitalization of $ 1.73 Trillion, which makes it a VRIN resource. Secondly, the R&D capabilities with huge investments like $ 42 Billion recently make its R&D capabilities a VRIN resource and enables Amazon to enhance their product range. Due to its e-commerce presence in different countries across America and Asia, it has developed valuable relationships with distributors and suppliers and has gained a plethora of customer information. Whereas competencies like customer experience and IT infra are the competencies that could be easily duplicated as they are imitable.
Based on the competencies which could provide long-term advantages like brand name, R&D, distribution network, customer knowledge, and relationship with suppliers we could come to the conclusion that Amazon should diversify into smartphones. Since Amazon’s previous devices like Kindle, Firestick, Echo, etc. all are related diversification products because of overall economies and synergy benefits, therefore smartphones should also be included in related diversification.
- Porter’s 5 Forces — Porter’s 5 forces framework enables companies to understand the competitive environment of the industry and could be used to understand the attractiveness of an industry. The 5 forces analysis will help Amazon to decide on whether it should enter the smartphone market or not. To analyze the competitive environment, we will be evaluating each factor one at a time.
a) Competition in the industry (Rivalry) — The ease of availability, price ranges, and technology adaptation have made smartphones part of everyone’s daily routine. As the demand has plateaued over the years recently, smartphone companies are focusing on R&D and innovations. Also, with the entry of companies catering to low price range customers, the competition/rivalry in the industry has gone significantly up. Barring a few players, all the competitors do not have any room for charging additional premiums or margins. Very stiff competition makes the smartphone industry very unattractive. Amazon entering the industry would not be a good idea considering the saturation in the market.
b) Bargaining power of suppliers — Most of the suppliers are small and generally do not have any power over the suppliers. Only Google is the only major supplier who has strong bargaining power which is one of the major competitors of Amazon. Apart from it, the chip manufacturers and gorilla glass manufacturers have reasonable bargaining power. With this information with Amazon, basing their entry on bargaining power over suppliers could make the industry moderately attractive.
c) Bargaining power of buyers — Customers of smartphones have become extremely familiar with the product and have multiple substitutes/choices for the same category. The availability of options and competition among smartphone companies has tremendously increased the bargaining power of buyers. The room for charging a premium is lacunae and that makes the industry extremely unattractive to be in or to enter.
d) Threat of Substitutes — The smartphone industry has a plethora of competitors and products, which increases the threat of substitutes. The companies with numerous products for similar price ranges have caused product cannibalization. The threat of substitutes has made the industry highly unattractive, and Amazon should not enter with such a high threat to the substitutes market.
e) Threat of new entrants — The entry into the industry does not have any high barriers in terms of investment and R&D, but the marketing, brand name in the smartphone industry, and promotions that incumbent players are doing make entry of new players extremely difficult. Even a giant like Google has not been able to hold its ground in the smartphone market provided Google’s capabilities. This makes the smartphone industry highly unattractive for new entrants.
Porter’s five forces analysis concludes that the smartphone industry is highly saturated, customers have high bargaining power, and has high barriers to entry which makes it an extremely unattractive industry to enter. Based on Porter’s 5 forces, we could conclude that the smartphone industry is highly unattractive and has high entry barriers, which means that Amazon should avoid entering the industry.
- Vertical Integration (if planning to enter) Requirement — The decision of vertical integration depends upon the costs associated with in-house manufacturing vs outsourcing. While manufacturing in-house production and administrative costs are involved, whereas procuring from the outside product price and transaction costs are involved. Transaction costs include search costs, negotiating/bargaining costs, monitoring, and implementation costs. Given the nature of the smartphone industry, transaction costs would not be very high due to the low bargaining power of suppliers. Whereas in-house costs could be high to develop the required technologies or products to manufacture smartphones. Even though Amazon has a lot of expertise in AI and product ranges, it needs to develop and cover a lot when it comes to the smartphone industry. The example of Amazon’s unsuccessful venture fire phone is a validation of the fact that the in-house costs would result in costly smartphones and an increase in production costs. Therefore, we can conclude that for Amazon, the costs associated with manufacturing the smartphones in-house are higher than the costs associated with procuring from outside given the nature of the smartphone industry. To sustain and enter into the industry amazon might lose its advantage of core competency by letting outside products and processes enter the Amazon ecosystem.
Conclusion — Based on the above analyses using different frameworks and evaluation of options, we can have the following conclusions.
- Even though Amazon has a lot of competencies where it could have a competitive edge over other players but those are spread over a huge range of products that might not be combined for a single industry.
- Based on Porter’s five forces, we can conclude that the smartphone industry has very high competition with high entry barriers, low bargaining with customers, and a highly saturated environment with a high threat of substitutes. All these factors result in a highly unattractive industry for amazon to enter.
- Lastly, Amazon needs to be procuring products/capabilities from outside to enter the smartphone industry which might prove costly in the long run, in terms of their core competencies advantage. The costs of outsourcing might become extremely high in the long run which might not be a good idea for Amazon.
- The conclusion of the analysis is that Amazon should not enter the smartphone market considering the factors discussed above.