MGMT20132 - Innovation and Sustainable Business Development Assignment, Central Queensland University, Australia
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Task - Business case report: Develop a business case document. Identify a business and the business stakeholder you will be writing the business case for.
The innovative idea recommended for Amazon's online shopping business is a process innovation. It is about Amazon opening pickup centers on a large scale and encouraging customers to choose pickup centers for picking up their goods rather than choosing the home delivery route. The pickup centers will be located strategically near neighborhoods which have higher concentration of customers who make frequent purchases from Amazon. Amazon's sophisticated data analysis capabilities can help in identifying neighborhoods where concentration of customers who make more frequent purchases from customers is higher. Customers who choose the pickup route should be offered discounts, linked to the price of the goods. The ROI for investors and shareholders in the medium and long term because of implementation of this innovation will be 10%.
The organization is Amazon, especially its online shopping or online retail business. An innovative idea has been suggested here. It has also been explained how the implementation of this innovative idea can help Amazon create more value for its customers and other stakeholders. It has also been explained why the implementation of this idea is a financially viable decision as it will generate positive returns on investment.
Problem to be solved
The problem before Amazon's online shopping business is how to increase its profitability. Amazon is a leader in the online segment. But the company is still struggling to achieve high levels of profitability (Kee, 2018). Much of the profits of Amazon come from its cloud and web service business, Amazon Web Services (AWS). The contribution of the online retail business to its profitability is very small.
In order to increase the profitability of its online business, the company has to find innovative solutions that can help it reduce its operating costs. Increasing revenues by increasing prices is another way to improve profitability. But given the tough competition in the retail industry, both from online retailers and brick-and-mortar retailers, increasing prices may not be such a good and competitive move (Hammett, 2018). Therefore the better way is to find innovative solutions that can help it in reducing its operating costs. Lower operating costs will mean higher profits for the online shopping business of the company.
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In order to reduce operating costs there are two ways before Amazon. One is to identify areas in its online retail business where there are wastages. Then take steps to reduce these wastages. Lower amount of wastages means lower operating costs (Knight, 2019).
The other way is to come up with innovative solutions that can cut resource consumption of the online retail business. Lower resource consumption means lower operating costs. The focus of finding the innovative solution in this report has been to find an innovative way that can help Amazon in reducing its resource consumption so that its operating costs can be brought down and profitability is increased.
Portfolios of innovative ideas that were selected in the process
Brainstorming and design thinking tools were used by the group while trying to come up with an innovative solution to solve this problem of Amazon's online shopping business. In brainstorming, every group member just came up with any idea that came to her mind. All the ideas that seemed viable were recorded (Lupton, 2011). Then the design thinking approach was applied to identify the best idea among the ideas that were given by the team members.
The portfolio of innovative ideas or solutions that was generated during the brainstorming session included the following ideas:
1. Amazon should use electric vehicles more in the last mile delivery. This will reduce its consumption of fuel. This in turn will reduce its operating costs. The implementation of this idea will also make its operations more environmentally sustainable.
2. Amazon should open small pick -up stores in every major city in which it operates. It should give customers the choice of picking up the goods that they have ordered online, from these stores. This will reduce the resources and costs that Amazon spends on last mile delivery from its warehouses to the doorsteps of customers.
3. Amazon should replace cardboard packaging with jute packaging or packaging by other more environmentally sustainable material. Substantial resources of Amazon are spent in packaging. It has also faced criticism for using too much material in its packaging. This is one area where there is significant scope for cutting down resource consumption and operating costs.
Solution selection analysis
Design thinking method was used to select the best idea out of the three ideas that came up in the brainstorming stage. Design thinking is a systematic approach to test the practical viability of an innovative idea (Liedtka, 2015). If an innovative idea is not practically viable then it has no value for a business or its stakeholders. The main steps in design thinking are Empathizing, Defining the problem, Ideation, Prototyping and Testing. Each of the three ideas was taken to all these stages of the design thinking method. The idea that scored best on the design thinking parameter was selected.
It needs to be mentioned here that design thinking method was used in the selection process because it is the most widely used method now that companies and businesses are using to come up with innovative solutions that are not only innovative but also have the capability to create value for stakeholders (Brown & Barry, 2017).
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Innovative idea that was selected
The innovative idea that was selected for final recommendation after the design thinking test was that Amazon should open a few small pick up centers in each major city. Customers can be given the choice of home delivery or picking up the goods that they ordered online from the pickup center. Incentives such as a free gift or a small discount can be given to customers to encourage them to make the choice of picking up from the pickup centers rather than the choice of home delivery.
When more customers will make this choice, Amazon will save on resources such as fuel and the energy of employees that is spent on the last mile delivery from the distribution center to the address of customers. This in turn will result in lower operational costs and higher profits in the long term. This idea is innovative because Amazon currently has very few pickup centers in very large cities but these centers are meant for fast track orders (Evans, 2019). They are for customers who want to get their goods as soon as possible. The pickup centers do not target all the customers of Amazon. They also do not offer any incentive to encourage more customers to choose this route.
The target customers are all Amazon customers who use the online shopping store of Amazon and offer goods from there. The innovative idea is essentially about large scale roll out of small pickup stores in every city or town that Amazon currently serves. The essence of this innovative idea is that if Amazon wants to make its online retail business significantly profitable in the medium and long term then it should make this change in the business model of its online retail business (Kwun, 2018). It should encourage customers to choose the option of pickup over the home delivery option.
Value proposition benefits
The new innovative idea has value proposition that creates value for all the stakeholders of Amazon (Osterwalder & Pigneur, 2013). Customers who make the choice of picking up the goods from the pickup centers rather than get them delivered to their addresses will get discounts. These discounts will result in cost savings for them.
For the shareholders of Amazon, Amazon will make operational cost savings on the last mile delivery that it made to the addresses of customers. These operational cost savings, in the medium and long term, will be much more than the investments that will have to be made in setting up the pickup centers (Mishra, 2015). The operational cost savings will permanently give a lift to the profit margins of Amazon on every unit sales that it makes.
Employees or channel partners who are currently deployed in making last mile delivery to the addresses of customers can be redeployed in the pickup centers. Additional employment may also be created as these pickup centers are opened on a large scale in every major city and town.
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Business Model description
As explained in the previous section, this innovative idea is essentially about making Amazon making a slight change to its business model for the online retail business. The new business model is about Amazon focusing on making more customers switch to pickup centers. It should continue offering the home delivery option. At the same time it should have the strategy to encourage customers to pick their goods from pickup centers by offering discounts or other incentives to customers who make the choice. This discount should be linked to the value of the goods that the customer has ordered. For instance a discount of 3% of the selling price to the goods if a customer makes the choice of picking up from the pickup center. This will mean that a customer who has ordered higher value goods will get a higher amount of discount in absolute terms. Such a customer is more likely to make the choice of picking up from the pickup center. Large value items are usually bulky items. Amazon has to spend higher amounts in the delivery of these higher value items. So cost savings for Amazon will also be higher.
The pickup stores should be small in size. This will keep investments on rents and leases for these stores under control (Pappas, 2016). The stores should be opened strategically so that they are opened in areas where they are in vicinity of neighborhoods that have concentration of customers who make more frequent purchases from Amazon's online store. Amazon's sophisticated data analytical capabilities can help in identifying such areas without any difficulty (Parker & Wang, 2016).
Business model description using the Business Canvas Model
- Value proposition - For customers who choose the pickup store route, it will result in cost savings through discounts.
- Channels - The distribution channel will be the pickup centers.
- Customer Relationships - Customers will be encouraged to pick the goods that they ordered from the pick-up centers by offering them discounts linked to the value of their purchase.
- Revenue streams : The pickup centre route will result in indirect revenues through operational cost savings. Increased visibility of Amazon due to pickup centers may also increase revenues.
- Key resources : Key resources required for implementing this innovation are strategic locations and spaces for opening up the pickup stores; employees for running the pickup stores; and financial resources.
- Customer segments : The target customer segment will include all those customers who do online shopping at Amazon.
- Key activities: Key activities of these pickup centers will be receiving the goods from the distribution centers and then handing them over to customers who come for picking them up, and recording these transactions.
- Key partnerships: Partnership with distribution centers will be required for these pickup centers.
- Cost structure: The cost of running a pickup center will mainly include the rental cost and human resource costs. These pickup centers can be operated at very low costs.
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Financial Analysis / Financial value capture
According to 2018 annual report of Amazon, fulfillment costs were $34 .02 billion. Fulfillment costs include the cost of getting the goods delivered to home addresses of customers. Amazon currently charges shipping costs from customers. But these shipping costs cover the last mile delivery costs only partially (Schleifer, 2017). Within the first five years of implementation of the pickup store idea, fulfillment costs are likely to come down by 10%, even after offsetting the costs incurred in incentive measures, such as discounts, to encourage more pickup orders. This estimate also includes the costs of investments that will have to be made in setting up the pickup stores. The 10% decline in fulfillment costs means 10% increase in profitability of business.
Pickup stores on a large scale will increase the brand visibility of Amazon. This will be a marketing benefit for Amazon. Due to the pickup centers located in cities and towns, people will get to see Amazon's brand elements, such as logos more (Tidd & Bessant, 2018). This marketing benefit can increase sales of Amazon further and can cause some positive increase in the revenues of Amazon.
It can be said that in the medium and long term the investments made in implementing this new innovative idea will result in return on investment (ROI) of at least 10%. This innovation, if implemented effectively, will result in positive wealth creation for investors and shareholders of Amazon.
This innovation has a great strategic fit with the existing business model of the online retail business of Amazon. This will be a process innovation. It will enhance the business model of Amazon by giving it the capability to set up pickup centers near the homes of customers. Amazon will have both home delivery and pickup center availability on a large scale, after implementation of this idea. The risk of the business model of its online shopping business will be reduced further because of this.
This innovative idea if implemented properly will result in significant value creation for investors and shareholders of Amazon. It will solve a major problem of low profitability of online retail business of Amazon. This innovation will bring significant benefits in the medium and long term for the company.
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