Introduction
Amazon is one of the world’s largest online retailers, and its industry is highly competitive. To truly understand Amazon’s success in such a crowded market, it is helpful to analyze the external environment using Porter’s Five Forces Model. Evaluating each of the five forces will help determine the profit potential of Amazon, which is valuable information to executives and shareholders. While these forces are not analytically viable for long-term decisions, they provide useful insights into a company’s profitability status.
Porter’s Five Forces Analysis on Amazon
Industry Rivalry
Amazon participates in a highly competitive retail industry that is comprised of many players. Amazon’s main competitors are Walmart, Target, and Best Buy (Xu et al., 2023). These traditional retailers have kept costs low due to their scale, access to capital, and resources. They also offer customers an easy shopping experience as they know their products, pricing, and locations (Reinartz et al., 2019).
Amazon has cemented its position over competitors by providing customers access to a vast selection of products at competitive prices and online shopping convenience. Furthermore, Amazon’s Prime program provides members with various benefits like free shipping, streaming services, and discounts, encouraging them to remain engaged with the platform. Due to intense competition in the Amazon industry, there is little room for price increases or cost reductions, which may lead to decreased profitability.
The Threat of New Entrants
The barrier to entry into Amazon’s industry is relatively low, meaning that new players can easily enter the market. New entrants can potentially reduce the overall market share of existing players as they may offer customers a better value proposition or a different selection of products (Islami et al., 2020). Furthermore, digital retailing has seen tremendous growth in recent years, with new players entering the industry, such as Overstock and Wayfair (Gauri et al., 2021). These companies can quickly grow to Amazon’s offering level in terms of selection and pricing, thus making it difficult for Amazon to maintain its competitive edge. This high threat of new entrants means that Amazon must continuously improve its services and products to remain competitive.
Threat of Substitutes
The retail industry constantly evolves as customers become increasingly aware of their purchases. Customers are becoming more price-conscious, seeking alternatives or substitutes to traditional retailing. For instance, customers are now turning to second-hand stores and online marketplaces like eBay and Etsy for cheaper products (Yrjola et al., 2021). Furthermore, the advent of digital technologies has given rise to new competitors that provide alternative services like streaming movies or grocery delivery, placing pressure on Amazon’s industry to remain competitive or risk losing customers to other options.
Power of Suppliers
Amazon relies heavily on its suppliers for the products it carries. As such, they have significant power when negotiating prices with Amazon. This means that if suppliers can increase their prices, it could potentially affect Amazon’s profitability (Islami et al., 2020). Furthermore, suppliers are increasingly turning towards digital retailing as they can more easily target customers and bypass traditional retailers in the distribution process. This allows them to gain leverage when negotiating terms with Amazon as they can access alternative distribution channels.
Power of Buyers
Buyers in Amazon’s industry have tremendous power as they can compare prices and products across different retailers. Customers can easily switch to another competitor if they find a better value proposition or a more suitable selection. Customers can also influence Amazon’s offerings through their purchasing decisions. For example, customers increasingly prefer organic and eco-friendly products, forcing Amazon to adjust its selection to meet customer demand. Thus, buyers have the power to shape Amazon’s industry as they can easily switch between retailers if they do not find what they need.
Conclusion
Amazon faces a challenging competitive environment due to the potential threat of new entrants, substitutes, suppliers, and powerful buyers. To remain ahead, Amazon must focus on offering customers the best value proposition regarding selection and price while continuously innovating its products and services. By staying informed of trends and understanding customer needs, Amazon can stay ahead of the retail industry while remaining a leader in digital retailing.
References
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Islami, X., Mustafa, N., & Topuzovska Latkovikj, M. (2020). Linking Porter’s generic strategies to firm performance. Future Business Journal, 6(1). Web.
Reinartz, W., Wiegand, N., & Imschloss, M. (2019). The impact of digital transformation on the retailing value chain. International Journal of Research in Marketing, 36(3), 350–366. Web.
Xu, H., Yan, X., & Zheng, H. (2023). Analysis of the investment value of the e-commerce industry. Proceedings of the 4th International Conference on Economic Management and Model Engineering, ICEMME 2022, November 18-20, 2022, Nanjing, China. Web.
Yrjölä, M., Hokkanen, H., & Saarijärvi, H. (2021). A typology of second-hand business models. Journal of Marketing Management, 37(7-8), 761–791. Web.