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History and Development
Established in 1994 by Jeff Bezos, Amazon quickly became the world’s most popular and successful online bookstore. Later, it extended its product offerings to cater to the needs of diverse customers around the globe. The key financial objective of the organization was to reach long-term sustainable growth; to achieve this, Amazon integrated and maintained a lean culture that predominantly focused on widening the operational income while managing operational costs. The name “Amazon” was mostly connected with the principal objective of the company’s management. As Amazon was the longest river on the planet and was a natural phenomenon, Jeff Bezos wanted his brand to be associated with the worldwide phenomenon of the largest online marketplace.
By the year 2008, Amazon reached a global brand status with websites operating in the largest countries in the world (Canada, US, UK, Germany, France, Japan, and China). Furthermore, by 2012, Amazon employed up to 56,300 workers in different countries (Hoffman, 2015). With the increased demand for online shopping services, Amazon began investing in developing a website that would keep up with the increasing traffic and serve all customers effectively. When it comes to the sphere of the company’s operation, the creation of a convenient and user-friendly website is a primary objective since customers are expecting to get accurate search results, reliable customer services, true fulfillment, and an accurate system of transactions. Therefore, it is not a surprise that Amazon invests a lot of time, effort, and funds into developing a website to serve prospective customers’ needs.
Porter’s Five Forces
When evaluating a company, the application of Porter’s Five Forces can be an effective method for identifying what conditions influence or do not influence the company’s operation. However, it is important first to examine the industry in which the company operates to have an idea about the dynamics of its interactions with customers, competitors, and suppliers. Amazon.com, Inc is a retail trade business (Primary NAICS Code: 454113 – Mail-order Houses) that provides online shopping services and an abundance of products from which customers can choose. In the recent decade, the industry of online shopping has shown a dramatic increase in scope. According to the report by Stevens (2016), in 2016, shoppers made 51% of their purchases online compared to 47% in 2014; this shows the tremendous demand for websites such as Amazon and the declining interest in physical stores that do not offer enough convenience and as many products compared to online stores.
Regarding competitive rivalry in e-commerce, Amazon experiences a strong force of influence since competition is always fierce with other retailers such as physical bookstores or even electronics retailers. Direct competitors of Amazon include websites such as eBay, Apple, Wal-Mart, Alibaba, Barns & Noble, MediaBay, Priceline, and others (Hoffman, 2015). A strong force of influence is also seen in the bargaining power of Amazon’s customers. Because the company’s vision is directly linked to establishing a customer-centric business (Greenspan, 2017), customers’ bargaining power plays a large role in how the company operates and whether its revenue increases. Some external factors support the intensity of customers’ bargaining power; these include the high quality of information, low switching costs, and the availability of substitutes (all three factors exhibit a strong force). On the other end of the spectrum, Amazon’s suppliers’ bargaining power shows a moderate effect since there is a relatively small number of vendors, which are all moderately sized and show moderate forward integration (Greenspan, 2017). Amazon also experiences a strong force of threats of substitutions due to the highly competitive market with lower costs for substitutes, their high availability and low switching costs; these factors make the company quite vulnerable to the threat of substitution, so it is the priority of the management to create a strategy that would ensure long-term success in the industry with a high number of replacements for companies. Nevertheless, the threat of new entrants is a weak force due to the increased costs of developing a brand and large economies of scale, which entrants have to achieve to become threatening for Amazon.
Amazon Vs. Alibaba and Wal-Mart
Comparing Amazon with two of its key competitors, Alibaba and Wal-Mart, shows that the company shows stable growth. For example, Wal-Mart’s total assets remained on a relatively same level (around $200 billion) between 2012 and 2016, while Amazon showed a steady increase from around $40 billion to $90 billion in four years. This is evidence of the company’s strategy working to its advantage: instead of the assets growing rapidly and then quickly declining, they increase slowly but steadily; such a pattern of assets’ increase can ensure the company’s long-term stability and competitive advantage. If to analyze revenues, both Wal-Mart and Alibaba experienced almost the same level, while Amazon showed an increase in four years (approximately $90 thousand in 2012 and $150 thousand in 2016). Return on Equity also increased in 2016 compared with 2012, and the graph of its progress shows that Amazon experienced some minor increases or declines that still resulted in long-term growth; while Wal-Mart’s ROE remained in the relatively same level, Alibaba showed a sudden spike in growth between 2013 and 2014 while declining dramatically between 2014 and 2015, which shows the company’s lack of stability and long-term growth. The Return on Sales for Amazon was steady, similarly to Wal-Mart; however, Alibaba showed sudden increases and decreases. In 2014, Amazon’s operating margin reached a very low level compared to 2012 and 2013, which showed a lack of potential to satisfy creditors and create value for shareholders; however, in 2015 and 2016 the operating margin increased dramatically while both Alibaba and Walmart showed a decline during this period. EBITDA margin usually provides investors and business owners with an idea of a company’s cash flow. Both Wal-Mart and Amazon were on a similar level, while Alibaba’s EBITDA increased significantly in 2013 and started decreasing in 2014 and 2015.
Regarding gross margin, Amazon also showed a steady growth between 2012 and 2016, which is evidence of the company’s strategy to achieve long-term growth is working. Total assets turnover for Amazon ranged between 2.1 and 1.8, while Wal-Mart had a relatively steady indicator, and Alibaba showed a decline. Property, plant, and equipment turnover of Amazon showed a steady decrease the in the curve between 2012 and 2016 from around 10 to below six while Wal-Mart remained on the same level through four years; the same cannot be said for Alibaba, which did show a steady decrease and then a steady decline.
Amazon’s Competitive Advantage
Amazon.com, Inc. dominated the sphere of online retail, especially in the United States. While a niche retailer could “nibble at the edges” (Kline, 2015), attempting direct competition with the company seems ineffective. One of the key aspects of Amazon’s competitive advantage is the ability to offer customers the most affordable prices as well as an intricately developed network of deliveries supported by storage warehouses placed around the country. Furthermore, Amazon has also invested in its robot company that developed non-human workers in warehouses. Thus, it can offer a variety of advantages that the majority of the company’s competitors would find nearly impossible to duplicate. Thus, shipping and pricing are the main aspects of the company’s competitive advantage.
Amazon has reached a massive scale of the globally known Internet retailer that can arrange the most affordable prices possible. Wal-Mart can also get similar deals with vendors, which makes it the largest competitor of Amazon. However, Wal-Mart has to pay more for physical stores than Amazon pays for shipping warehouses; this puts Amazon’s cost on the lower step compared to Wal-Mart and contributes to the company’s ability to save and earn more. It is important to mention that although Wal-Mart can also become an online store, the outrage from in-store customers would be hard to handle, which is an issue Amazon does not have to endure.
Quick handling and shipping procedures made Amazon so popular for its products. Because Amazon does not have physical stores and thus invests in optimizing its delivery systems, it has managed to achieve a very high level of shipping operations that are hard to beat. By strategically placing its warehouses and integrating innovative technologies, Amazon has developed a unique system of order handling that could even start packaging new orders based on predictive algorithms (Kline, 2015).
Greenspan, R. (2017). Amazon.com Inc. Five Forces analysis & recommendations (Porter’s model). Web.
Hoffman, A. (2015). Amazon.com, Inc. Retailing giant to high-tech player? Web.
Kline, D. (2015). Amazon’s sustainable competitive advantage. Web.
Stevens, L. (2016). Survey shows rapid growth in online shopping. Web.