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Buying Power Is Not Always Enough

November 26, 2009

Wal-Mart is determined to offer low prices and instant availability. And so, it seems, is Amazon. Hence the two are increasingly locked in a batttle.

An article in the New York Times describes the nature of the price war that has emerged, with Wal-Mart’s enormous buying power pitched against Amazon’s low-cost distribution model. The story is interesting because it illustrates the growing influence of technology on market competition and the extent to which these new models also rely upon commercial capabilities and influences.

Amazon – with a mere $20bn in on-line sales – cannot compete with the tremendous buying power of Wal-Mart. But it can perfect an alternative and lower cost distribution model. As the article describes, in the US market, Amazon is able to take advantage of the fact that on-line purchases are frequently not subject to sales taxes (representing a typical saving for the buyer of 6 – 8%). For larger items, the Amazon offering obviously includes delivery. And in the larger metropolitan areas, Amazon has now designed a sophisticated distribution network that often allows same-day delivery. They have invested heavily in their supply chain management capabilities.

For all its size in terms of spend, Wal-Mart coveres thousands of product areas, many of which Amazon may not choose to replicate. At present, its great strength is that most people still buy in stores, rather than on-line. But whether Amazon can continue making inroads to shopping habits is the big question. And moving forward, there are many businesses that need to be wary of the impacts that new technologies are starting to have – and ways that these might enable competitors to erode significant areas of their business.

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