Amazon.com’s
low price was achieved through structural cost advantage as well. Running a
bookstore requires heavy capital investments and involves high fixed costs
because books are bulky items that require physical display and storage space.
Jeff Bezos’ genius was in moving the bookstore online.
ln the virtual world, you can
display millions of books but not incur the kinds of fixed costs that would
handicap any start-up. And Amazon.com also made arrangements to have orders
shipped directly from publishers’ warehouses to the customer, thereby saving it
a lot of money on warehousing. This structural cost advantage turned Amazon.com
into the world’s No. I online book retailer and the world’s largest bookstore.
While Dell’s strategy was to remove the middlemen from the equation,
Amazon.com’s strategy was to insert itself as the middleman between the
publishers and the customers using its virtual bookstore. But what both Dell
and Amazon.com have done is to remove a very high-cost component from the
business model and in Amazon.com’s case, it is the physical bookstore and the
warehouse. Like Dell, however, Amazon.com is now using its well-established
distribution channel to sell other items like CDs, DVDs, VCDs, etc. We feel it
should stay focused on books because line-extending will dilute its focus and
harm it in the longer run. But that’s another story for another time.
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