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CASE 1: KINDLE FIRE

AMAZON'S HEATED BATTLE FOR TABLET MARKET

Prepared for Professor Enrico DiCicco

Marketing 187 Seminar in Strategic Management

California State University, Fresno

ABBA Cohort 1 Visalia 2018

Prepared by:

Albert Chavez

Alexandra Rios

Jacqueline Verduzco Alanis

12/15/2018

Contents

Executive Summary 4

Case Profile 5

External Environment Analysis 6

Industry Analysis (Porters Five Forces) 7

Rivalry among Competing Firms (High) 7

Threats of New Entrants (Low) 8

Threat of Substitutes Products (High) 8

Bargaining Power of Suppliers (High) 9

Bargaining Power of Buyer (High) 9

Internal Environmental Analysis 10

Financial and Quantitative Data 10

Profitability Ratios 10

Net Margin 10

Return on Equity (ROE) 10

Liquidity Ratios 11

Current Ratio 11

Quick Ratio 12

Debt/Equity Ratio 12

Financials 12

Problems Identification (SWOT Analysis) 14

Situation Analysis 14

Strengths 14

Weaknesses 15

Opportunities 16

Threats 18

Strategy Formulation 20

Product Positioning 20

Customer Segments 21

Media Streamer 21

Children & Mobile Gamers 21

Higher Education 21

Strategic Implementation and Action Plan 22

Conclusion 23

References 24

Executive Summary

This case highlights the challenges Jeff Bezos encountered as he guided his company into the exploding tablet market. The following case analysis demonstrates the strategy and critical decisions involved in selecting which customer segment to target and a positioning strategy for the Kindle Fire, as the tablet market rapidly evolved. To achieve this, Amazon was willing to heavily subsidize the Kindle Fire hardware device, with a starting price of $49.99, substantially lower than their competitors. The key assumption was that the superior end-to-end experience Amazon had carefully created would lead to incremental purchases of content as well as physical products and services, and that the profit margins gained would outweigh the cost of the hardware subsidy.

The Kindle Fire has continued to evolve since its inception with continuous adaptations to match current technology and consumer trends. Although Amazon's Kindle Fire is not the tablet market leader, they have however developed a successful strategy of imitating existing market products and releasing their own cost-effective version to help Amazon leverage its new and growing video streaming business. The new 2018 Kindle Fire HD 8 Tablet can download, stream and run millions of movies, TV shows, songs, Kindle eBooks, apps and games including Netflix, Facebook, HBO, Spotify and includes Alexa personal assistant as a built-in feature.

The Kindle Fire was originally targeted towards three main consumer segments, Media Junkies, Children and Mobile Gamers and Higher Education. Amazon's continuous focus on innovation of its product portfolio is a good signifier for its improving market share across all the segments. Along with the new version of Fire HD 8 tablet, the company has also rolled out Fire HD 8 Kids Edition, an advanced tablet built specifically for children. Contributing to Amazon's success in the tablet market, Amazon has exceptional supply-chain management procedures whereby they offer significant discounts on previous generations of their Kindle tablet/e-reader devices in order to reduce inventory carrying costs. Lastly, Amazon has successfully acquired other online retailers through various acquisitions, to help strengthen Amazon's competitive position from the likes of Apple, Microsoft, Google, Lenovo, Samsung, and Huwaei.

Amazon has successfully targeted and adopted a strategy focused on the high quality of its tablet e-reader while adapting and improving its features to better serve their target market. Through their expanding and innovative product portfolio, Amazon has been able to better cater to their customers through competitive pricing, ease of purchase, quality products, and exceptional customer service. We believe that Amazon has successfully marketed their brand and will continue to drive tablet sales figures, which will translate to continued revenue generation for the Kindle Fire.

Core Competencies

Customer Service:

Amazon's mission statement is to be "Earth's Most Customer Centric Company." To that end, one of their core competencies is definitely their customer service.

Innovation:

Amazon strives for innovation at all turns in their company. Developing the Whispersync network for their Kindle devices changed the way in which ebooks were delivered to devices. Amazon also patented the 1-click checkout process which many retailers, including Apple, had to license until the patent ran out in 2017. Recently they are piloting register-less stores which are surely to change the physical shopping landscape.

Tech-centric:

Amazon would not be able to innovate at the rate they do if they were not an extremely tech-centric company. Amazon doesn't only sell ebooks, they are also a major player in cloud storage and web services.

Distribution and Inventory Management

Amazon's efficient distribution and inventory management is one of the major reasons for their retail success. With backend systems providing data integration across order processing, warehouse and distribution workflows, Amazon can take an order and initiate shipments in a matter of minutes.

Strong Branding

Amazon has so carefully cultivated their brand to the point that Amazon and customer service are synonymous for their consumers.

Case Profile

This case highlights the challenges Jeff Bezos encountered as he guided his company into the exploding tablet market with the introduction of the Kindle Fire. The Kindle Fire was designed to provide users with the full Amazon experience at arm's reach, and Bezos envisioned the Kindle Fire would provide consumers with a physical manifestation of all things Amazon.  The following case analysis demonstrates the strategy and critical decisions involved in selecting which customer segment to target and a positioning strategy for the Kindle Fire's success, as the tablet market rapidly evolved.

Net Sales revenue of Amazon from 2004 to 2017 in dollars

External Environment Analysis

The exploding tablet market had seen some slow down compared to the previous fourth quarter of 2016, however the worldwide detachable tablet market grew to 6.5 million units in the fourth quarter of 2017 (4Q17), an increase of 10.3% from the previous holiday season, according to preliminary data from the International Data Corporation.  The Kindle fire, Kindle and E-books operate in the same market using two criteria because of its e-readers capabilities and display technology, the touch screen technology, the operating system, applications and hardware.

The Kindle Fire is competing in saturated tablet/e-reader market. Kindle Fire competitors have features not available with the Kindle, such as more RAM, front facing cameras, higher pixel density and faster/larger processors. Despite lacking these added features, the Kindle Fire provides users value through the Kindle's simple, reliable e-reader that also functions as a tablet. Amazon's business strategy can be described as a cost leadership strategy in which an integrated set of actions taken to produce goods or services with features that are acceptable to customers at the lowest cost, relative to that of competitors (Hitt, Michael A., et al). The low cost and access to the Amazon marketplace including Apple apps gives the Kindle Fire the upper hand with cost savvy consumers.

Industry Analysis (Porters Five Forces)

Rivalry among Competing Firms (High)

Top Five Tablet Companies (Detachable + Slate), Worldwide Shipments, Market Share, and Growth, Fourth Quarter 2017(preliminary results, shipments in millions)

Amazon has continually dominated the e-commerce market. The competition is very high in the tablet market, so the competitive intensity is high. Multiple new entrants entered the tablet and e-reader market since the Kindle Fire's release which threatened the success of the Kindle Fire. Amazon faced competition on numerous fronts. As seen in the chart above, in 2016, Amazon.com was able to steal the second position from rival Samsung as the online giant offered steep discounts during the holiday season.   The low-cost Kindle Fire tablets have been relatively successful as shopping catalogs for Amazon's Market Place and have further improved the tablets function by including its voice assistant, Alexa in its newest tablet. While Apple has been the tablet leader, their focus has been with the iPad pro which will begin to target commercial and education segments while the Kindle Fire will focus on children with the release of their Fire HD 8 Kids Edition. With so many tablets being offered with varying features, choosing the right tablet for consumers is difficult. To remain a competitor, the Kindle will have to continue to add more features that add value for its best customers, while remaining the easiest, most reliable e-reader all while creating brand loyalty.

Threats of New Entrants (Low)

In the e-reader's and tablets market there are numerous barriers to entry, such as financial and technological resources, distribution channels, highly specialized knowledge before entrants can become viable competitors to the Kindle Fire. It would be rather difficult for a new start up to have a substantial impact and become a leading competitor in the tablet market. This kind of market presents high levels of network effects through brand, embedding, and scale meaning that that when a company's product or service becomes more valuable as usage increases. The tablet market is currently at the maturity phase, the threat of entry is low because the market has already peaked and will eventually slow down. Sales growth has started to slow down, and the product has already reached widespread acceptance in the market making it less incentivized for new entrants into the tablet market.

Threat of Substitutes Products (High)

The tablet market is highly competitive and as such the threat of substitutes is high. Features on a tablet are only beneficial to a consumer if they are at a price point that they can afford. The Kindle Fire is already available at a much lower costs compared to their competitors, however even with Apple, they are offering more cost effective options for consumers to entice them to purchase their brand. Even with tablets that serve as substitutes, they don't have the Amazon Marketplace embedded into the device which gives Kindle Fire a distinct advantage compared to the Kindle Fire substitutes.

Bargaining Power of Suppliers (High)

Amazon has formidable friends in Google and Adobe, among others, who have a strong interest in making Fire succeed. Publishers and other content providers interested in the success of Amazon in order to balance Apple's negotiating power. Publishers of content are willing to make deals with Amazon because they are willing to share subscriber's information, something that Apple is unwilling to do. Publishers are then able to push their content onto consumers because Amazon has given them access to their consumers. These arrangements will increase the dependency for consumers as they will experience a cost increase by not having access to the Amazons marketplace and is wide array of content publishers.

Bargaining Power of Buyers (High)

  As previously mentioned, there is a high rivalry in the e- reader and tablet market and there a substantial amount of competitors. Due to the fact that this is a highly saturated market, the cost of switching from one tablet to another is low unless a consumer is seeking specific features without considering price. For the average consumer, tablets and e-readers can be considered an expensive item which means that most often consumers will make an informed decision about their purchase and will be less likely to switch to a different device.

Internal Environmental Analysis

Financial and Quantitative Data

Profitability Ratios

Net Margin

This is a good ratio to look at for publicly traded companies because it relates to how much profit, per dollar, a company can make. As net profit margin increases, the likelihood that investors will invest in the company increases, thereby contributing to a more valuable stock.

Amazon's net margin has increased tremendously throughout the last four years. However, there is a bit of stagnation between 2016 and 2017. This same small dip can be correlated to return on equity.

Return on Equity (ROE)

Return on Equity percentages are considered good if they are between 15-20%. Return on equity refers to a company's ability to make money from their equity. While Amazon's ROE has increased sizably, it hasn't seen a steady increase as it dropped roughly 1.5% from 2016 to 2017.

Return on Assets (ROA): This refers to how much income a company receives in relation to how many assets they own. ROA greater than 5% is typically good. Amazon's ROA has increased over the last four years but isn't terribly great.

Conclusion: The Company is seeing a rather upward trend.

Liquidity Ratios

 

Current Ratio

This ratio measures how well a company can pay off its short and long-term obligations. The industry average for companies Amazon is measured against is 1.43. Amazon's ratio has been steadily performing between 1 and 1.1. This means that about 25% of companies in the same industry perform better in this regard.

Quick Ratio

Similar to the current ratio, but quicker to calculate is the quick ratio. In this regard, Amazon isn't impressive as a healthy quick ratio is 1:1.

Debt/Equity Ratio

A higher debt-equity ratio may mean that a company isn't able to pay out financial obligations. For Amazon, a high debt-equity ratio along with a lagging current ratio suggests that the company is less liquid than idea.

Financials

Operating margin measures how well a company retains profit for every dollar of revenue after costs of labor and production are paid out.

Amazon's operating margin increased over the past 4 years but then began to decline again. Compared to other retailers, Amazon's operating margin isn't particularly impressive because it doesn't outperform many other moguls in the retail area. The comparison below shows that Amazon has room for improvement in this area.

Operating Profit Margins:

Problems Identification (SWOT Analysis)

Situation Analysis

INTERNAL  STRENGTHS

 Brand

 Content

 Pricing Strategy  WEAKNESSES

 Hardware

 Apps

 Tablet Market

EXTERNAL  OPPORTUNITIES

 Increasing tablet demand

 Leveraging cost of device  THREATS

 Competitors

 Own app's cannibalism

Strengths

Contents & Brand

Amazon's name brand recognizability is undeniable. Although it developed a popular marketplace for books and retail goods, Amazon now sells music, video, apparel and beauty products as well. Amazon's early start on eBook market lead them to contain more contents than any other competitors. Amazon has over 1 million e-Books available and 100,000 movies and TV Show with unlimited streaming to their Amazon Prime Members for only $99 per year (Amazon.com). Apple boast a wealth of software and hardware intended to work together seamlessly on its devices, but the offerings of Amazon's ecosystem as one of the world's largest retailer are unmatched. Beyond its more tangible features, Amazon is a huge advantage for the Kindle Fire in terms of brand recognition. While there are lots of Android-based devices in the market, but Amazon's Kindle brand is a name which consumers know and trust. With the inclusion of movie and music streaming, the Kindle Fire offers a vast media library to consumers.

Pricing Strategy

When the Kindle Fire was introduced in 2011, Amazon announced its price as $199, which meant that it cost less than half of their competitor's Tablet Apple IPad. In 2012, they announced Kindle Fire HD, next version of Kindle Fire, and gave it the same price as the Kindle Fire, $199. Amazon's pricing strategy is simple: sell as many devices as possible, even if at a loss, and recoup those losses through the sale of content. This strategy has helped Amazon capture 19% of the tablet market share in the United States as of 2017. Amazon takes any opportunity to push the Kindle Fire out at low cost during its popular promotional periods such as Prime Day in July, and during Christmas. For the current Christmas season, 2018, Amazon has the Kindle Fire at a promotional starting at $49.99.

Weaknesses

Hardware & Apps

Initial reviews of the 2011 Kindle fire were mixed to negative, with critics insinuating that the low price was indicative of a lack of quality. Others were not satisfied with its weaker performance comparing it competitor product iPad. Along with the less powerful hardware, there is the fact that although Kindle Fire runs Android OS, Amazon chose to implement its own app store, rather than use Google Play, locking its users out of what is the largest app store as of 2017. Google Play boasts almost 3 million apps in its store and Apple's App Store carries over 2 million apps. Meanwhile, Amazon's app store trails with 600,000 apps available on its devices

Market & Price

Apple has secured a strong lead in the tablet market. They sold more than 29 million iPads in the products first 15 months on the market, its competitors suffering with less successful. For example, Research in Motion, maker of the BlackBerry line of smartphones, said it only shipped 200,000 of its own rival to the iPad, the Playbook, in three months. While Apple secured its high-end, high-price tablet market, Amazon had to compete with the Nook, Barnes & Noble's popular color e-reader in the low-price segment. Recently, Samsung's Tab and Apple iPad Mini have become a threat to Amazon's Kindle products and they also pursue a low cost strategy. A Low-price strategy was the biggest advantage at the beginning of the market, but it became no longer their advantage, instead it might have a weakness.

Opportunities

Increasing Tablet Demand

The global tablet market has rapidly grown, providing new opportunities for market players. Estimated global tablet shipments in 2017 totaled 172 million units. This volume is expected to reach 185 million devices in 2020. Amazon has a great opportunity to capture a significant amount of tablet users.

Leveraging

Amazon leveraged the Kindle brand name to introduce its already sizable e-reader customer base to the Kindle Fire. By launching Kindle Fire and Kindle Fire HD, Amazon expanded and shifted its existing e-reader's interest onto tablets. It led them to increase size of the market and customer base. For the Kindle Fire, they put the same website design, search engine, and recommendation system to approach familiarity to existing consumers. Amazon tried leveraging its existing online store to integrate users' accounts, therefore consumers could find, order, and manage content easier. Now, Amazon can leverage its immense media library to entice new customers onto the Kindle Fire.

Threats

Competitors

The Kindle Fire's operating system is based on Android technology. This operating system is used by other e-readers and smart phones and may not provide the Kindle with a competitive advantage. Google launched their own tablet with Android OS, nexus 7 and 10. Price of Nexus 7 is $199 which is directly competing with the Kindle Fire. With better hardware and apps availability, Nexus 7 became serious threat to Kindle Fire. Also, Apple recently launched the iPad mini to take away customers from Kindle Fire. Apple was always the biggest threat to Kindle, and a recent survey of more than 2000 online consumers by PriceGrabber found that 52 percent of those surveyed said they would look at buying an iPad Mini over Kindle and Nexus 7. Competitors' products are not just providing same feature as Kindle Fire, but also with better quality of product, it decrease value of Kindle Fire to the its customers.

Other Smart Devices

Amazon makes their Kindle (reading), Prime Video and Prime Music apps available both on Android devices as well as on Apple iOS devices. The use of these apps allows Amazon Prime members to access their content on any device. Although this means that Amazon can sell content across platforms, it also makes the purchase of a Kindle for the purpose of accessing their proprietary content unnecessary.

Strategy Formulation

Kindle Fire: Positioning the Kindle Fire

The Kindle Fire was introduced to the market in 2011 when the tablet computer market was starting to see serious growth. The front runner was the iPad however; the Kindle Fire had some competing characteristics. The price was a major difference the Kindle Fire was much cheaper and gave the impression that it was more durable as it was made with more hard plastics which made it a great purchase for parents that wanted to have their children play with tablets. While the iPad was selling on a platform of being the new cutting-edge technology Amazon sold on their functionality and practicality. They played up existing services previously offered by the e-readers that were already a hit with Amazon. The gaming and streaming was much more family oriented with kid friendly games and parental controls on devices. The tablet computer market has developed into different segments you have much more options to fit your computing needs. Microsoft and Samsung have become leaders in the market. Below I describe the four major tablets that are being purchased and how they compare to the Kindle Fire.

Product Positioning

Kindle Fire Versus the Surface Pro: Priced at $50, the Kindle Fire is much cheaper than the cheapest surface pro which starts at $799.

The Microsoft tablet is more of a laptop than a tablet in many respects. The Surface Pro is advertised as the capabilities of a laptop with the mobility of a tablet. This has been the biggest competitor of the iPad in recent models as these tablets are becoming larger and more complex.

Kindle Fire Versus the Samsung Tab: Priced at $50, the kindle fire is less than half of the price of the cheapest Samsung tab coming in at $129.

The Samsung tablet came the closest to the cost of the Kindle fire and is one that compares to it on more levels. The size is smaller, and it does not have the big computing capabilities that the Surface Pro and iPad offer its consumers. But it takes up a portion of the mobile tablet market by offering various smaller sized models which come off as overgrown cell phones. It is lightweight and versatile on the tablet end with the familiarity of a Smartphone. Most Samsung tablet users are previous Samsung phone owners which have been the recent trend in how the new tablet models are being developed.

Kindle Fire Versus the Ipad: Priced at $50, the Kindle Fire comes in over $200 below what the cheapest iPad at $269.

Because of this, it is not competing directly against the iPad. It is instead taking out a slice of the potential iPad market. The Apple tablet push has always leaned heavy on innovations and integrating the best technologies for their users. The latest iPad has grown in size and capabilities due to the competition from the Microsoft Surface Pro. The days of trying to compete with a small tablet with book reading capabilities has been replaced with making the best crossover between a tablet and a laptop.

Customer Segments

Media Streamer

The case study mentioned that the Amazon has already attracted the most ‘avid consumers of media' but questioned whether or not they would hold on to the fire long-term. I believe that if Amazon integrates the Fire stick into the tablet it would make a big jump in their media streaming uses. This option is currently available only on televisions via a HDMI USB module that runs streaming software. Making live TV and sports easier to watch and Fire tablets.

Children & Mobile Gamers

Children's tech market is hard to capitalize on you must have simplicity for children's comprehension of the device as well as having it compete with other tablets on the market to make it a good value to their parents. Which leads us to the hardest market to tap into; the millennials? They have seen the gaming world change rapidly into a lucrative business through tournaments and big sponsorship deals through tournaments. The mobile gaming options have recently changed with the unveiling of the Nintendo Switch which converts the traditional at home gaming console into a mobile gaming hub. While the Fire is still capable of playing many games it would only lessen other highlights that the Fire offers over mobile gaming devices.

Higher Education

 This segment of the market could prove fruitful given the proper partnership with established vendors such as Pearson or Cengage. They can have Fire devices preloaded with text books or offer incentives to students where access to books can be cheaper by purchasing course loads of books through an Amazon service. One setback that many students face is the availability of text and devices that can support study modules on tablets. The current modules will not work properly due to formatting issues that restrict tablets from using certain keys. They could also offer a tablet rental service for this purpose like they currently are doing with textbooks.

Strategic Implementation and Action Plan

 After analyzing the product positioning against different tablets that are leading the market and different customer segments, here are our recommendations:

1) Position the Fire directly against the Samsung Tab: The Samsung Tab is the most similar device to the Kindle Fire, and thus poses as a direct threat. Amazon should continue to integrate its successful technologies to expand their customer base through existing platforms.

2) Do not position the Fire directly against the iPad or Surface Pro: These tablets have developed into completely different tablet markets by creating it. These have become crossovers between tablets and laptops while keeping the most complex computing abilities. They do not fit the Kindle Fire product description by size and capabilities.

3) Position the Kindle to appeal primarily to families and existing customers: As stated several times throughout this paper, the Kindle Fire is a device used primarily for media consumption by families and media streamers. This includes books, movies, TV shows, music, the web, and light gaming. Amazon has become a much larger entity since it first came out with the Kindle Fire and has shown improvement across multiple viewing platforms. We believe that with more products and service integration the customer base would grow and continue to become stronger by grouping services and products under the Amazon umbrella.

4) Position the Kindle in a School or educational environment: Amazon currently offers many services and products to college students primarily as book rentals. We suggest partnering with publishers and schools to develop Kindle Fire tablets to be used in an educational setting while being able to work with online modules. The biggest obstacle when using a tablet for school is that all the capabilities are not there for being able to get access online and have work well with school websites. Condensed size in tablets should not condense a student's learning capabilities but ease their use with programs and aid in completion of assignments. By developing products through schools and publishers would be the best method of creating a more sustainable education based tablet.

Conclusion

Amazon has successfully targeted and adopted a strategy focused on the high quality of its tablet e-reader while adapting and improving its features to better serve their target market. Entering the niche market of tablets for kids represents a major opportunity for Amazon. Through their expanding and innovative product portfolio, Amazon has been able to better cater to their customers through competitive pricing, ease of purchase, quality products, and exceptional customer service. We believe that Amazon has successfully marketed their brand and will continue to drive tablet sales figures, which will translate to continued revenue generation for the Kindle Fire.

References

Hitt, Michael A., et al. Strategic Management: Competitiveness & Globalization: Concepts and Cases. Cengage Learning, 2017

https://www.cnet.com/reviews/amazon-kindle-fire-tablet-8-gb-7-series-review/

financials.morningstar.com. (2017 Retrieved from Morning Star:

http://financials.morningstar.com/ratios/r.html?t=AMZN&region=usa&culture=en-US

https://www.emarketer.com/Chart/US-Tablet-Users-Penetration-2014-2020/185739

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