The main objective of this report is to critically analyze Amazon’s operations and business environment for the purposes of identifying the nature of its business, industry, and challenges, and recommend appropriate course of actions for future success. One of the most significant environment trends in Amazon’s industry involves decreasing the time it takes for a commodity to reach the consumer once purchased. The bargaining power the suppliers is considered medium-high. The power of suppliers is medium in the sense that the firm is able to source its inventory from a wide range of suppliers both nationally and internationally. Moreover, as a global market leader, the firm is able to exploit its influence over the smaller suppliers for competitive prices. However, the suppliers hold high bargaining power since Amazon does not run production plants and therefore has to rely on the suppliers for its inventory. The firm also faces a myriad threats in the online retain market. The main significant threats to the company include cybercrime, imitation, and intense competition with other retail companies. Amazon’s weaknesses present challenges that hinder its effective business operations. The most significant weaknesses of the firm include: an imitable business model’ limited brick and mortar presence, and limited penetration in developing markets.
Amazon is recognized as one of the leading electronic commerce companies in the world. Although the company is not a pioneer in the field of online retailing, the firm has revolutionized the industry into an art form. Amazon has cemented itself as the leading brand associated with online shopping. The firm has perfected its sales channels and continues to invest in technology and innovation to remain relevant in the highly dynamic internet environment. The company lacks a brick and mortar location and its business is solely founded on the online platform. The firm is a founded on a basic delivery mechanism that connects its content, products, and services from the producers, manufacturers, publishers, and wholesalers from various parts around the world. The firm has set up more than 40 distribution centers that are strategic located in its major global markets. The firm’s leadership in the industry of online commerce is still experiencing growth. However, the company is experiencing various challenges that threaten its dominance in the future. Moreover, with the company operating in a highly dynamic industry that is characterized by intense competition, it is critical to perform a critical analysis of its operations, identify its strategic weaknesses, and propose possible solutions for future success (Haucap, & Heimeshoff 49-61).
Analysis of the External Environment
One of the most significant environment trends in Amazon’s industry involves decreasing the time it takes for a commodity to reach the consumer once purchased. For this reason, the firm has made significant investments in the advanced logistics platform that involved leasing twenty Boeing 767 jets, acquiring thousands of company trucks, and setting up many fulfillment centers internationally. The entire program is based on Amazon’s new 1-2 hour delivery service that is expected to disrupt the ecommerce market. The second trend is the need to enhance the security of the ecommerce services. There has been an increase in fraud cases and website breaches that have threatened various organizations engaging in electronic commerce. Firms are therefore focusing on ensuring the security of their systems and restoring and increasing customer confidence (King, Sen, D’Aubeterre, & Sethi2010).
The use of Porter’s five forces is an effective way of assessing Amazon’s business environment. The five forces comprise of supplier power, buyer power, competitive rivalry, threat of substitution, and threat of new entry. The bargaining power the suppliers is considered medium-high. The power of suppliers is medium in the sense that the firm is able to source its inventory from a wide range of suppliers both nationally and internationally. Moreover, as a global market leader, the firm is able to exploit its influence over the smaller suppliers for competitive prices. However, the suppliers hold high bargaining power since Amazon does not run production plants and therefore has to rely on the suppliers for its inventory.
The bargaining power of the buyers is relatively high. The buyers have a wide range of alternative sources of accessing the products and services that Amazon offers due to the numerous internet based retail sites and physical retailers. Therefore, Amazon is forced to offer its products and services at competitively low prices to retain its customer base. The level of competition in the industry within which Amazon operates is intensely high. The industry comprises of countless companies offering nearly similar products and services. The threat of new market entrants is low. Although it is quite easy for a firm to set up a website and offer products and services that are similar to those of Amazon, it is virtually impossible for such a new firm to attain the magnitude of inventory, global reach, and status that Amazon enjoys. Amazon enjoys a long history and experience in the history that spans for more than 15 years. Moreover, the firm has developed a huge market awareness that is virtually impossible for a new company to easily achieve. The threat of substitute products is high. With the exception of the firm’s patented technology such as 1-Click Ordering, there exists a wide range of alternatives to the company’s products and services. Additionally most of the major physical book stores have also set up websites that allow their customers to access their services online (Prinz 1-29).
As one of the major E-commerce firms, Amazon mainly relies on psychographic and demographic segmentation to segment its markets. The firm’s segmentation is mainly based on actual purchase behavior. Therefore, the firm depends on what the customers actually purchased and not necessarily what they are interested in. The company has adopted a micro-level segmentation strategy that targets each customer individually and thereby allowing the firm to convert visitors to its website into long term and high value customers.
Amazon has adopted an E-commerce segmentation strategy that mainly involves creating personals that will purchase specific products and services and in a certain way. Amazon mainly targets the upper and middle class income earners who hold practical knowledge and experience of basic technology but lack the time to visit the physical shopping outlets or prefer the convenience of shopping remotely. The management has successfully positioned the firm as a “Go Global Act Local” ecommerce leader where customers are able to purchase anything and have it delivered at their convenient locations (Sean 142-145).
For a comprehensive analysis of Amazon’s financial performance, it is prudent to also take into consideration the financial performance of one of its greatest rival, EBay. In terms of sales and revenue Amazon’s revenue for the year 2014 totaled $88.99 billion, which was a 19.52% or $14.54 billion increase in comparison to the previous year. eBay, on the other hand, had a net revenue of $17.94B for the same period, signifying an increase of 11.76% or $1.89 billion from the previous year.
In terms of profitability, Amazon attained a gross profit of $33.98 billion while eBay’s gross profit was $13.39 billion. Moreover, Amazon has recorded a consistently higher gross profit margin since 1999 over that of the main competitor. Valuation metrics such as price to earnings ratio (P/E) and price to sales ratio (P/S) indicate the firm whose stock has a higher value and the firm with a greater return on investment. Amazons P/s ratio for the year 2014 was 1.686 while that of eBay was 4.156. Amazon’s P/E ratio for the same year was 840.65 while that of eBay was 25.33 indicating that Amazon had a higher market value than eBay (Quah and Toh 131-137).
Major Strategic Issue
The SWOT analysis is one of the critical tools to identifying the strategic challenges plaguing the company. More specifically, the strategic issues normally stem from the threats facing business and its inherent weaknesses. Therefore, conducting a SWOT analysis and limiting the analysis on the threats and weaknesses reveals the strategic issues plaguing the firm.
Amazon’s weaknesses present challenges that hinder its effective business operations. The most significant weaknesses of the firm include: an imitable business model’ limited brick and mortar presence, and limited penetration in developing markets. The business model adopted by the firm can be easily imitated by other companies. For instance, it is quite easy to develop websites and set up online based retail services that sell a wide range of products and services. Moreover, Amazon mainly relies on the developed markets such as Europe and the United States for much of its sales. As a consequence, the firm may find it difficult to penetrate the developing markets when other competing firms have already captured such markets. Additionally, the firm’s brick and mortar presence makes it difficult for the company to influence customer purchases on certain types of products and services that tend to sell more on physical stores in comparison to online stores.
The firm also faces a myriad threats in the online retain market. The main significant threats to the company include cybercrime, imitation, and intense competition with other retail companies. The issue of cybercrime is a threat to virtually every company with an online presence. A number of online retail stores, with the most significant and recent one being Target Inc, have experienced major cyber hacks resulting in the loss of money, sales, customer confidence. Imitation is another major threat that could potentially results in a significant loss of market share. Moreover, the presence of intense competition in the market serves as a threat to its profitability and market share as large retail firms as Walmart are now diversifying their operations and venturing into ecommerce (Schneider 76-83).
Available Alternative Strategies
There are two major strategic alternatives for the company. The alternatives are also based on the SWOT analysis whereby the management can either capitalize on the firm’s strengths to solidify its competitive advantage or exploit the existing opportunities to increase its revenue and global market share. The main strengths of Amazons in the industry comprise of a strong brand image, extensive product mix, and the highest revenue in the industry. Amazon enjoys the strongest brand image in the online retail industry. The strength can be attributed to its protracted market presence, experience and customer satisfaction. The company is characterized by an extensive product mix that serves as a one stop shop where customers can easily find what they want at the company website. Additionally, the company is the greatest income earner in the online retail industry. The strength therefore makes it able to easily invest in new ventures, technology, and process improvement. Amazon also enjoys various opportunities. The main opportunities include venturing into the largely untapped developing markets, extend its brick and mortar business, and enhance measures of decreasing counterfeit sales.
Amazon Company holds the necessary strengths and potential to further its dominance in the online retail industry. It is therefore recommended that the company exploits its strong capital base and working experience to effectively exploit the developing markets. African and Asian markets are rife for exploitation owing to the increasing internet penetration and income levels. The firm should therefore move first and establish its presence before other competing firms do so. The firm should also diversify its brick and mortar stores for it to effectively compete with other firms such as Walmart. The firm should also invest heavily in online security in ensuring that all its sensitive company and customer data remains secure and online transactions are free from unwarranted interference.
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Schneider, R. R. (2002). Sustainable Amazon: Limitations and Opportunities for Rural Development. Washington, D.C: World Bank.
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