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Amazon.com Inc.’s Five Forces and Recommendations Essay


Amazon.com, Inc. is one of the leaders in the sphere of e-commerce. While focusing on more than twenty years of the company’s experience and history as the largest online retailer all over the globe, it is important to conduct the business analysis of Amazon’s case. First, it is necessary to discuss the company’s background with reference to its history and key events which have determined Amazon’s progress in the market. Second, it is essential to conduct external and internal analyses in order to discuss the company’s strategy in the context of a specific e-commerce environment. Third, much attention should be paid to the analysis of Amazon’s business-level and corporate-level strategy. Last, it is necessary to provide recommendations for addressing weaknesses and threats which will be identified during the analysis.

Company Background

Amazon.com, Inc. was established by Jeff Bezos in 1994 as an online bookstore with the headquarters in Seattle, Washington. In 1995, the company that specialized in e-commerce sold its first products.1 Amazon began to develop as a modern online retailer, and it quickly became a leader in the e-commerce industry. As a result, in 1997, the company became public. The 2000s can be discussed as a period of the company’s active and sustainable growth. The leaders of Amazon were focused on increasing profits, and the company became represented in more than 200 countries all over the globe while selling not only books but also video and audio products, video games, toys, beauty products, sports products, and electronics among other goods.2

Much attention was paid to developing customer-oriented mobile devices or gadgets, including Kindle and Fire tablets. Furthermore, the company chose to invest in a range of acquisitions and subsidiaries, including such projects as Shopbop and Goodreads among others. In 2012, the company also launched Amazon Web Services which became interesting to customers globally.3 In December of 2016, the company opened first Amazon Go stores in the context of strategies directed to improving Amazon payments and to developing physical retailing.4 Currently, Amazon is characterized by a stable financial growth of profits, and it has been announced in February of 2017 that the company’s sales increased to about $44 billion.5

Thus, Amazon is focused on the further development, and its mission is to “offer our customers the lowest possible prices, the best available selection, and the utmost convenience.”6 Furthermore, the company’s goal is “to be Earth’s most customer-centric company, where customers can find and discover anything they might want to buy online.”7 From this point, Amazon is oriented to the further progress in order to address customers’ needs regarding e-commerce and the availability of different types of products that can be delivered to almost all regions of the world on time. Therefore, the company’s values are accountability, diversity, quality, and integrity.

External Analysis

The Five Forces Analysis was developed by Michael Porter as an instrument to assess the competition within industries in the 1980s. While focusing on the industry’s structure and actors, it is possible to determine factors that can have an effect on any company’s competitiveness within the market. The focus is on determining the bargaining power of consumers, the bargaining power of suppliers, the threat of substitutes, the threat of new entrants, and the rivalry among major competitors.8 The bargaining power of consumers is a strong force in the industry of online retailers because buyers determine what products will be popular, and they also have an opportunity to choose among retailers while accessing and comparing the information about the quality of products and services.9 There are many alternatives that can be selected by consumers within the industry or in other markets.

The bargaining power of suppliers is moderate because suppliers can influence the availability and delivery of products, but these aspects can be regulated while referring to other providers or sellers. However, it is important to note that, in the online retailing industry, the number of suppliers is still low, and it depends on services proposed by an e-commerce company.10 Furthermore, the threat of substitutes is high. Thus, products proposed in online stores that are similar to Amazon can be easily substituted because consumers can choose their preferred online stores or some local stores. In addition, although Amazon is focused on proposing Kindle products and specific web services, there are many substitutes for them in the industry.

In its turn, the threat of new entrants is a weak force because online retailers develop with reference to the brand recognition, and although the number of small e-commerce companies is high, they cannot be equal competitors to Amazon. Therefore, it is important to concentrate on the rivalry among major competitors, including Amazon, Apple, Inc., Walmart, eBay, Barnes & Noble, MediaBay, iTunes, and Netflix. Only these online retailers and services can be viewed as equal competitors in the industry.11 The level of competition among them is high because these companies are oriented to attracting the same group of consumers who are interested in purchasing high-quality goods and services in the most efficient manner.

From this point, the key factors that influence Amazon’s macro-environment are a high number of substitutes and competitors, variable costs, the availability of information, a small number of suppliers, and the important role of brand recognition. As a result, referring to the Five Forces Analysis, it is possible to note that opportunities opened to Amazon are the further expansion and development of services and products, as well as increases in profitability based on the reference to the brand name. Still, possible threats include the further development of the tendency to buy products in local shops rather than online.12 One more threat is associated with the privacy protection and security of financial information because it is a typical issue for e-commerce.13 The appearance of new substitute products is also among potential threats to Amazon.

Internal Analysis

Value chain activities are usually associated with value-adding methods and techniques that are used in companies to contribute to their competitiveness.14 As a result, specific resources and capabilities which are utilized by Amazon in the context of a value chain also contribute to developing the company’s competitive advantage, and they need to be discussed in detail. Primary activities which are important for Amazon to attract consumers and expand sales are operations associated with the work of the website, the work of Amazon Web Services, the production of specific hardware and software, targeted e-marketing, customer services, and logistics to guarantee on-time deliveries.15 Much attention is also paid to Research and Development in order to increase the company’s competitiveness in the industry because of improving websites and products, monitoring consumers’ preferences, as well as controlling the quality of processes, services, and technologies. The focus is also on building fulfillment centers in the most appropriate areas to guarantee on-time deliveries of products around the globe.16

Support activities in the value chain of Amazon include the development of technology, procurement, and human resource management. Procurement is based on developing relationships with suppliers, distributors, and partners. As a result, resources and capabilities which are associated with the value chain include Amazon’s Research and Development, innovative technologies, the brand name, the diversified product mix, the price strategy, the customer-oriented approach, the effective marketing, and the creation of a range of services, including e-commerce resources, billing resources, and payment services.17

Furthermore, while conducting the internal analysis, it is also important to concentrate on Amazon’s strengths and weaknesses. Thus, the company’s strengths include its strong brand recognition, the developed community of users, the provision of cost-efficient and high-quality services and products, and the expanded product mix. Amazon remains to be a leader in the industry with the broad coverage of markets, effective management, and strategic leadership.18 However, it is also possible to identify weaknesses in Amazon’s progress, such as the reliance on a business model that can be used by competitors and the lack of resources to address the rivalry in local markets.

Business-Level and Corporate-Level Strategy

While discussing Porter’s generic strategies, it is important to focus on differentiation and cost leadership. Differentiation is characterized by creating products and services that differ from alternatives in the market. Cost leadership is based on decreasing costs for manufacturing products that can be associated with reducing prices.19 Therefore, it is possible to state that Amazon follows the cost leadership strategy. The first approach is the reduction of costs associated with wasting resources. The company follows the strategy of saving costs while building its centers near airports and developing packaging techniques to eliminate wasting resources.20 Furthermore, Amazon is focused on launching cost-efficient alternatives to popular products in order to address consumers’ interests. Thus, the production of Kindle tablets requires fewer resources than the production of iPads, and prices of Kindle devices are lower to guarantee high levels of sales.21 The same strategy is followed for other products and services, and to produce them, cost-efficient approaches are selected by managers of Amazon.

However, it is possible to identify certain trade-offs associated with this strategy. In spite of the fact that Amazon’s profitability increases and reduced costs do not directly lead to decreased revenues, the company can orient only to a certain group of consumers, and significant rises of revenues in this segment cannot be forecasted.22 Furthermore, the optimization of production and minimization of costs and prices prevent Amazon from the further effective diversification and differentiation with the focus on manufacturing or proposing unique and expensive products or services. Moreover, Amazon’s competitors can potentially decrease production costs, and the company’s leadership in the market will become threatened.

Recommendations

In spite of the fact that Amazon grows and develops as a leader in the e-commerce industry, the internal analysis indicates that there are some weaknesses in the company’s strategies that should be addressed with reference to certain recommendations. Furthermore, the external analysis indicates that there are also threats which are associated with the development of the business environment, and potential solutions should be proposed to contribute to increasing Amazon’s competitiveness. From this point, Amazon needs to balance its reference to the cost leadership strategy and the differentiation strategy that is based on diversification in order to become able to cover more markets and attract the larger group of consumers in the situation when competitors apply similar strategies.23

Second, Amazon needs to pay more attention to opening Amazon Go stores in order to strengthen the company’s competitiveness against local physical retailers. It is important to note that this area requires further investment and development. Third, it is necessary to recommend the development of a unique strategy to protect consumers’ private and financial information online. Furthermore, Amazon’s activities depend on websites’ security and efficiency of payment systems. To address consumers’ concerns, more attention should be paid to developing this area in order to make Amazon systems highly protected and increase consumers’ loyalty.24 These recommendations can be viewed as effective to address issues that are observed in relation to the strategy that is currently followed by Amazon.

Conclusion

The Five Forces Analysis and internal analysis have indicated that the competition within the industry of online retailing is rather strong, and to guarantee a stable growth in this market, Amazon needs to focus on reconsidering its strategies. As a result, Amazon’s current initiatives which are oriented to the expansion in the sphere of physical retailing can be discussed as appropriate to address a challenge. The results of analyzing the business approach and techniques have indicated that Amazon’s cost leadership strategy is rather effective to cover the selected market, but it can be not enough to guarantee the successful expansion in other markets. Therefore, several recommendations are provided to accentuate methods that can be selected by Amazon in order to contribute to its competitiveness.

Bibliography

Amazon. Web.

Amazon Corporate. “Amazon Investor Relations.” Web.

Greenspan, Roberta. Panmore Institute. 2017. Web.

Hill, Charles W. L., and Gareth R. Jones. Essentials of Strategic Management. 3rd ed. Mason, OH: South-Western Cengage Learning, 2009.

Hoffman, Alan N. “Amazon: Retailing Giant to High-Tech Player?” In Strategic Management: An Integrated Approach, edited by Charles Hill, Gareth Jones, and Melissa Schilling. 11th ed. Stamford, CT: Cengage Learning, 2015.

Melville, Andrew. Forbes, 2017. Web.

Footnotes

  1. Alan N. Hoffman, “Amazon: Retailing Giant to High-Tech Player?,” in Strategic Management: An Integrated Approach, eds. Charles Hill et al. 11th ed. (Stamford, CT: Cengage Learning, 2015), p. 461.
  2. Ibid., pp. 461-462.
  3. Hoffman, “Amazon,” pp. 463-464.
  4. Andrew Melville, “Amazon Go Is about Payments, not Grocery,” Forbes.
  5. Amazon Corporate, “Amazon Investor Relations,”.
  6. Amazon, “Amazon Retail: Earth’s Biggest Selection 2017,”.
  7. Ibid., par. 1.
  8. Charles W. L. Hill and Gareth R. Jones, Essentials of Strategic Management, 3rd ed. (Mason, OH: South-Western Cengage Learning, 2009), p. 57.
  9. Hoffman, “Amazon,” p. 465.
  10. Roberta Greenspan, “Amazon.com Inc. Five Forces Analysis and Recommendations (Porter’s Model),” Panmore Institute.
  11. Hoffman, “Amazon,” p. 465.
  12. Hoffman, “Amazon,” p. 469.
  13. Greenspan, “Amazon.com Inc.,” par. 3.
  14. Hill and Jones, Essentials of Strategic Management, p. 91.
  15. Hoffman, “Amazon,” p. 464.
  16. Greenspan, “Amazon.com Inc.,” par. 3.
  17. Hoffman, “Amazon,” pp. 464-468.
  18. Amazon Corporate, “Amazon Investor Relations,” par. 2.
  19. Hill and Jones, Essentials of Strategic Management, p. 120.
  20. Hoffman, “Amazon,” p. 466.
  21. Greenspan, “Amazon.com Inc.,” par. 3.
  22. Hoffman, “Amazon,” pp. 466-469.
  23. Hill and Jones, Essentials of Strategic Management, p. 122.
  24. Greenspan, “Amazon.com Inc.,” par. 4.
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IvyPanda. (2020, September 8). Amazon.com Inc.'s Five Forces and Recommendations. Retrieved from https://ivypanda.com/essays/amazoncom-incs-five-forces-and-recommendations/

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"Amazon.com Inc.'s Five Forces and Recommendations." IvyPanda, 8 Sept. 2020, ivypanda.com/essays/amazoncom-incs-five-forces-and-recommendations/.

1. IvyPanda. "Amazon.com Inc.'s Five Forces and Recommendations." September 8, 2020. https://ivypanda.com/essays/amazoncom-incs-five-forces-and-recommendations/.


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IvyPanda. "Amazon.com Inc.'s Five Forces and Recommendations." September 8, 2020. https://ivypanda.com/essays/amazoncom-incs-five-forces-and-recommendations/.

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IvyPanda. 2020. "Amazon.com Inc.'s Five Forces and Recommendations." September 8, 2020. https://ivypanda.com/essays/amazoncom-incs-five-forces-and-recommendations/.

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IvyPanda. (2020) 'Amazon.com Inc.'s Five Forces and Recommendations'. 8 September.

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