Amazon Strategic Analysis - Case Study Example

Amazon Strategic Analysis Name Institution Course Date Executive Summary Amazon is American leading e-commerce retailer. The company was founded in 1994 by Jeff Bezos and opened its doors a year later in 1995 and has since grown to become a global e-commerce brand. Amazon provides a variety of products and services that includes books, software, electronics, toys, DVDs, food, furniture, CDs among others. The report indicates that the operations of are affected by macro-environmental factors as indicated in PESTEL and Porters Five Forces framework. These macro-environmental factors pose both threats and opportunities as indicated in the SWOT framework. Therefore, for Amazon to succeed, it must minimize the weaknesses and threats and take advantages of the opportunities available in the market by taking advantage of its strengths highlighted in the SWOT. Table of Contents Executive Summary 2 Table of Contents 3 Company Background 4 PEST Analysis 5 Political Factors 5 Economic Factors 5 Social Factors 6 Technological Factors 6 Environment Factors 6 Legal Factors 6 Industry Analysis 6 Porter's Five Forces Model 6 Competitive Rivalry 6 Buyer Power 7 Bargaining Power of Suppliers 7 Threat of New Entry 8 Threat of Substitution 8 SWOT Analysis 9 Strengths 9 Weaknesses 10 Threats 10 Opportunities 11 Strategic Recommendations 11 Conclusion 12 References 13 Company Background Amazon is American leading e-commerce retailer. The company was founded in 1994 by Jeff Bezos and opened its doors a year later in 1995 and has since grown to become a global e-commerce brand (Fast Company et al. 2014, p. 63). The company's headquarters is based in Seattle, Washington DC. Amazon offers a variety of products, including books, software, electronics, toys, DVDs, food, furniture, CDs and apparels among others through its website, www.amazon.com. As at 2014, Amazon had about 209 million active customers (Fast Company et al. 2014, p. 64). Its major countries of operations include the U.S., Canada, the UK, Australia, Germany, Japan, China, France and Mexico among others. Despite the challenges that Amazon is facing in the industry, such as growing competition, Amazon has maintained a lead in the online retail industry as it managed to post a profit of $79 million in 2015 (Ovide 2015). Amazon is also a major employer as the e-commerce giant currently employs approximately 230,000 people on full-time and part-time (Ovide 2015). PEST Analysis Political Factors Amazon's operations are affected by different political factors. These include the political stability and instability in markets where it operates. The company is also affected by the lobby and pressure groups in its countries of operation (Milliot, 2012). Additionally, the attitudes of the government towards e-commerce business and internet usage affect Amazon. Economic Factors The performance of Amazon is affected by a number of economic factors, including inflation and tax rates, the rate of economic growth, fluctuations in currency exchange rates and unemployment levels. In 2014, currency exchange rate fluctuation affected Amazon's net sales by US$636 million (Ovide 2015). The 2007/2008 global economic crisis coupled with a recession that followed also badly affected revenue generated by the retailer. Social Factors Amazon's operations are affected by various socio-cultural factors that include the fact that most consumers have not embraced online buying as part of a culture because of issues associated with online buying such as safety and uncertainty. Additionally, in many countries, people have the habit of buying from traditional stores instead of online (D'Onfro, 2014). Technological Factors The growth in the use of Smartphones affects Amazon as it requires the company to offer diverse mobile phone apps to facilitate online buying (Dickey 2012). The safety issues, such as hacking on the internet affect Amazon. However, the growth of internet usage worldwide favors the growth of Amazon. Environment Factors The operation of Amazon is affected by environmental laws that have been enacted by countries to mitigate greenhouse emission. As such, Amazon is forced to invest more in R&D to ensure that its operations are environment-friendly. Legal Factors The e-commerce business is regulated by laws that are designed to protect customers that Amazon must comply with in all the countries where it operates. Industry Analysis Porter's Five Forces Model Competitive Rivalry Competitive rivalry in e-commerce industry is high. Amazon has numerous competitors that offer same products and services with little to no differentiation. In the retail websites, Amazon's direct competitors include Noble.com, Barnes, and eBay. In the Marketplace, Amazon competes directly with auction websites, such as Yahoo!Auctions and Ubid.com and eBay (Ovide 2015). In the search engine, Amazon competes with Google, Ask.com, Yahoo and Bing. Other direct competitors of Amazon include Facebook , Wall-Mart, Bestbuy and Alibaba (Dickey 2012). Buyer Power The buyer's bargaining power is high. The customers that Amazon has have the option purchasing the same products in thousands of other online retail sites. As such, if Amazon charges high prices, then the customers might be forced to conduct an online search to find a competitor that offers the same products or services at low prices (Fast Company et al. 2014, p. 68). However, because Amazon adopts cost leadership strategy, it has been able to transfer the low cost of production to customers in the form of low prices in addition to its customer-centric approach. Bargaining Power of Suppliers The suppliers' bargaining powers are medium to high. Amazon's supplier power is medium because Amazon can get its stock from several suppliers that are spread in the U.S. and globally. Besides, Amazon buys its products and services in bulk and decides what goes to its website, thus giving the company some influence over smaller suppliers (Dickey 2012). However, the supplier power is high because it is impossible for Amazon to compete with suppliers as it does not operate any production facility. Threat of New Entry The threat of new entry into the e-commerce business is low. The e-commerce industry is capital intensive and requires a high degree of expertise to start and maintain and this creates a barrier to firms. Besides, giant companies, such as Amazon and Alibaba have built a strong reputation that spans over two decades, which also creates a barrier to new entry. Amazon has also differentiated its products and services to maintain customer loyalty as seen by the satisfaction index of Amazon's American customers that stands at about 88, according to D'Onfro (2014). Threat of Substitution Substitution threat is high. The products and services offered by Amazon have a lot of substitutes that can be bought in several stores. In the UK, for example, Argos acts as a direct substitute for Amazon. The books that Amazon sells can be bought at other sites, such as Noble Books, HalfPrice Books, and Barnes. Additionally, books can be purchased at drugstores, newsstands, and supermarkets among others. The same applies to music which can be bought at entertainment sites, such as YouTube, Bestbuy, and Virgin Megastores among others and this applies to all other products offered by Amazon. Nonetheless, as much as Amazon's products can be substituted with ease, the physical stores and websites of competitors might not provide the same quality of customer service and convenience as that provided by Amazon notes D'Onfro (2014). SWOT Analysis Strengths Strong brand image and reputation: The first major strength of Amazon is its strong brand image and reputation. Since the company was founded in 1995, Amazon has built a strong reputation and image in the e-commerce business. Currently, Amazon is one of the largest online retailers with strong brand image and presence across the globe (Di Stefano, 2012). Diversified product portfolio: Amazon was founded with books but has since diversified its product portfolio by introducing other product categories that include toys, apparels, electronics, games, white and brown goods, home and kitchen products software, DVDs, food, furniture and, CDs among others (Ovide 2015). Diversification is a strength for the company as it enables Amazon to receive a stream of revenue from different products. Cost Leadership: The cost leadership strategy adopted by Amazon is a strength as it enabled the e-commerce retailer to differentiate itself from rivals in the industry (Dickey 2012). The strategy also enables Amazon to lower its stock replenishment, thus giving the firm a competitive edge over rivals. Customer centric: Amazon is a customer-centric online retailer as the firm has created an extensive CRM system that allows it to record and process data on the buying behaviors of customers. This is strength as it has enabled Amazon to provide items individually or in bundles based on consumer preferences shown through buying or items visited (Fast Company et al. 2014, p. 63). According to data gathered by the company, about 55% of Amazon customers are repeat shoppers, which lower the cost of acquiring new purchasers (Fast Company et al. 2014, p. 64). Acquisition: Amazon has made a number of acquisitions in the past two decades, including acquiring strong brands, such as Zappos.com, IMBD.com, Junglee.com and woot.com (Dickey, 2012). These acquisitions have benefited the company by generating significant revenue for the online retailing giant. Glocal strategy: The adoption of the Glocal strategy has also been a strength to Amazon as it enabled the e-commerce giant to meet the local needs of the consumers in the foreign markets, where the company operates, such as India (Fast Company et al. 2014, p. 66). Efficient delivery system: Amazon beats its rivals because it has an efficient delivery system that is very reliable as it enables the company to deliver products to customers across the globe in the shortest time possible (Milliot, 2012). Weaknesses Falling margins: Amazon's profits have been dropping in the recent years and sometimes into losses. In India, for example, the online retail giant posted a loss amounting to $359 during 2013/2014 financial year (Ovide 2015). High debt: Amazon has accumulated huge debts particularly in developing nations where the company still struggles to be profitable. Tax avoidance issue: Amazon's image has been badly painted in the recent past following allegations of involvement in tax avoidance in the UK and the U.S. Flop in products: The flop of the fire phone and Kindle fire is a major weakness as the failures have proved costly to the e-commerce giant (Ovide 2015). Threats High competition: Amazon faces stiff competition both domestically and internationally. Government regulations: Amazon's operations are affected by issues, such as FDI because it is a global company. Consumer fears on online shopping: Consumers still adamant about shopping online and this threatens e-commerce business. Opportunities Expanding globally: Amazon has opportunity to expand to emerging markets, such as East Asia and developing countries Growing internet connectivity: Growing internet connectivity across the globe provides business growth opportunity for Amazon Acquisitions: Amazon has opportunity to acquire other e-commerce firms to help reduce competition. Strategic Recommendations Based on the PESTEL, SWOT, and Porter's Five Forces analysis, there are certain key strategic recommendations that Amazon should consider pursuing to promote its growth and competitiveness. Firstly, Amazon should consider expanding its market reach to Asia and developing economies, where there is a huge potential for e-commerce growth as indicated in the SWOT. Secondly, Amazon should consider enhancing the security of its payment system as most consumers are still afraid of buying products online because of security fears (D'Onfro 2014). Additionally, Amazon should engage more in aggressive marketing and promotional campaign to market its brand to create its brand awareness and attract more customers to its brand. Moreover, Amazon should consider differentiating its products and services further by adding unique and appealing features so as to be able to gain a sustainable competitive advantage (Fast Company et al. 2014, p. 70). Further, as competition gets stiffer, Amazon should consider lowering its prices further to attract price-conscious customers that are large in number Conclusion Amazon is one of the leading e-commerce companies in the world. The company was founded in 1994 and has grown to become a leading e-commerce business in the world. The macro-environmental analysis indicates that Amazon's operations are affected by many factors that include political, economic, social, technology, environment, and legal factors, as well as competition. These factors, however, presents both threats and opportunities. Therefore, to maintain a competitive advantage, Amazon should use its strengths to minimize the weakness and threats and to exploit the opportunities available in the market. References Di Stefano, T 2012, Amazon spreads its wings. E-business means business, viewed 30 May 2016 http://www.ecommercetimes.com/story/75978.html Dickey, M. 2012, The massive scale of Amazon's distribution operations, revealed through startling images. Business Insider 30 November, viewed 30 May 2016 http://www.businessinsider.com/massive-scale-of-amazons-distribution-operations-2012-11?op=1 D'Onfro, J 2014, Here's a reminder just how massive Amazon's web services business is. Business Insider 16 June, viewed 30 May 2016 http://www.businessinsider.com/amazon-web-services-market-share-2014-6 Fast Company, Fishman, C., Salter, C., Sacks, D., Rubin, H., McCorvey, J. J., & Gertner, J. 2014. Breakthrough leadership: Winning strategies from Amazon, Twitter, J.Crew, and other cutting-edge companies. Fast Company, Washington DC. Milliot, J 2012, Amazon picks up market share, viewed 30 May 2016 http://www.publishersweekly.com/paper-copy/by-topic/industry-news/financial-reporting/article/53336-amazon-picks-up-market-share.html Ovide, S 2015, A puny profit? Thanks, Amazon, viewed 30 May 2016 https://www.bloomberg.com/view/articles/2015-10-22/amazon-turns-a-tiny-profit-as-bezos-investment-shows-life Read More