Strategic Position of Amazon Business - Case Study Example

Executive Summary This report is prepared to analyze the strategic position of Amazon Business using SWOT and Porter’s Five Forces tools. The first section to be presented is the company overview then is followed by SWOT analysis. This SWOT is disintegrated into strengths, weaknesses, opportunities, and threats. The third section covers on SWOT matrix, which fundamentally represents graphically SWOT analysis. The next stage covers the use of Porter’s five forces to analyze competitive position of Amazon. Finally, the report will offer five recommendations to the management of Amazon.com Inc listed as: To capture more customers, an aspect of referees can be factored into any online purchases Customers making online purchase can be asked to rate the company’s services and subsequently highlight areas that need improvement. Provide incentive such as discount to frequent customers. This would improve repeat business. Collaborate with all levels of education to build a reading culture. To avoid seasonality of purchases, Amazon should carry out market studies then proceed to differentiate its products with respect to market descriptions and demand. Table of content Introduction ii Company Overview iii SWOT Analysis iii Strengths iii Weaknesses iv Opportunities v Threats vi SWOT Matrix vi Strengths - S vii Weaknesses – W vii SO Strategies vii Opportunities – O vii SO Strategies vii WO Strategies vii Threats – T viii ST Strategies viii WT Strategies viii Amazon SWOT matrix (Porter, 2008) viii Porter’s five forces viii Threat of entry viii Bargaining power of buyers ix Competitive rivalry ix Bargaining power of suppliers x Threat of substitute x Recommendation x Conclusion xi Reference List xii Introduction This business report starts with an overview of Amazon.com. Briefly, Amazon is a customer centric company based in US with three main sets of customers including consumers, sellers, and enterprises. The two major segments covered by Amazon are North America and International Markets. Through its retail website, Amazon serves its customers by focusing on wide selection, affordable prices, and convenience. The report then progresses to address two fundamental analysis tools including SWOT and Porter’s Five Forces Analysis. The SWOT will be further simplified in the SWOT matrix. Finally, this report will proceed to state five practicable recommendations listed. Company Overview Amazon.com Inc was started in 1994 by Jeffrey Bezos after noting that internet sales were growing very fast. The CEO launched the company in July 1995 with a vision to use online as a channel of making purchase of books fast, easy, and exciting experience to the customer. Since then, the company has continually expanded its customer base and sales revenue such that the revenue increased from $15.7 million in 1996 to $2.76 billion in 2000 (Hof, 2000). Now, Amazon.com is the destination for many customers. One of the main factors that have propelled Amazon into fame is its concentration on customer’s desires and the objective of personalizing client’s needs. SWOT Analysis This is a useful tool when auditing Amazon’s internal and external environment. Usually, SWOT analysis is the first stage of planning and assists marketers to pay attention to major issues. The strengths and weaknesses of SWTO are classified as internal factors while opportunities and threats fall under external factors (Porter, 2008). Strengths Amazon is one of the profitable and early exploiters of online technologies for e-commerce in the world. According to Amazon web, profits for the company curved in by 32% from $76m in 2004 to $52m (Amazon.com). At the same time sales level shot up by 26% to a level of $1.75 billion. It was not until recently that Amazon experienced huge losses simply because of its high initial costs of setting up the business. The most recent decline in profits emanated from promotions that offered reduced cost of delivering goods and services to the customers (Seipel, 2000). Amazon utilizes excellent approach to Customer Relationship while making use of Information Technology with an intention of supporting its business strategy. In an attempt to personalize and customize its products and services, Amazon deliberately records data on customer buyer behaviour. Discussion board available in Amazon’s website and its fast access enables customers to chat with members in the discussion boards consequently taking the customer through a learning experience. Through collaborative filtering, the company further enhances services to the customer by giving a proposed list of books obtained from frequently purchased materials (Linden, 2003). It is also important to note that frequent visitors to Amazon’s web are greeted by their names and subsequently allowed to view recommendations obtained from collaborative filtering. Weaknesses There is a possibility that Amazon brand would be damaged if new categories of businesses were added. Amazon is known as a leader in selling books to the final consumer. An introduction of other brands would definitely damage Amazon brand. To demonstrate this factor is a situation where Amazon starts selling toys and games yet Toy-R-U is branded as a leader in selling toys and games. This would definitely confuse any potential customer. In the same manner, customers would be confused if Toy-R-U sells books. The strategy of offering free shipping to customers ought to be reconsidered simply because of high costs that would definitely wear down profits. Online retailers also focus on innovative technology to enhance delivery of services. There are costs incurred to maintain the system such that customer satisfaction and provision of services is held at a high level. Amazon relies on external agents to deliver products to intended customer. This may result in insurmountable problems in relation to delivery of services. The dependency on independent external delivery firms at the same time may expand cost in accordance with the wider transport sector e. g rising cost of fuel and increased taxation. Opportunities As an online retail pioneer, Amazon is now busy selling its expertise to other major stores including British retailer Mark and Spenser who announced a joint venture with Amazon to selling its portfolio online (Cottrill, 2001). Toys-R-U and NBA recently entered into collaboration with Amazon to pursue e-commerce. To display increasing business opportunities with other retailers, Amazon opened Luxembourg-based division with an aim of providing tailored services to retailers in Europe. In the public arena, Amazon can build numerous business opportunities. In 2004, the company made an announcement to enter into an engagement with British Library. One of the benefits that accrue from this kind of engagement is that customers can search for rare books with a click of a mouse. Now, library’s catalogue of published materials is available at Amazon website which then imply that it is has information of over 2.5 million books on their site. Additionally, Amazon can develop relationship with publishers who publish frequently read materials. The company can go further and launch authors who belong exclusively to the firm. This would finally generate growth since customers are inclined to these writers. In a move into Chinese market, Amazon bought joyo.com in 2004. Joyo is similar to Amazon in that it trades in books, moves, toys, and music at a discounted price level. Apart from consulting other e-com retailing firms for partnership, Amazon can invest in preserving customer expectation, which would then promote customer’s loyalty. Threats To maintain a product differentiated is a difficult task especially in internet business. Competition therefore is tough and even propelled higher with constant business expansion. A strategy where competitors form mergers, joint ventures, and strategic alliances may see Amazon toppled from its top position. It is also fundamental to note that increasing transportation costs are likely to create a negative customer perception since such costs are transferred to the final point of consumption (Seybold, 1996). Products such as Christmas gifts are seasonal in nature thus bought only during a particular season. Nonetheless, overseas trade of products reduces seasonality given the existence of varied cultures. At the same time, a country has to understand trends and customs to make potential customers. An example is variation in religion between Muslims and Christians that then affects purchase of gifts and other products. SWOT Matrix This matrix represents the SWOT framework graphically. The main purpose of SWOT matrix is to enhance understanding. Strengths - S Weaknesses – W SO Strategies Strengths are used to take advantage of opportunities. 1. Very strong Brand Name for online marketing 2. Wide selection of products stretching from books to electronics 3. Customized technology in the website 4. Fast access to Amazon web 5. Partnership with independent transport companies 6. Largest online retailer 7. Offer free delivery 8. Constantly increasing Market share both locally and internationally 1. Information systems are not fully redundant 2. online commerce is very competitive 3. Business is affected by seasonality e.g. Christmas gifts. 4. Intense expansion into new services raises management costs. 5. Protection of intellectual property rights is difficult given existence of hackers. 6. Reliance on limited transport companies 7. Customers are unaware of wide selection available. WO Strategies Overcome weaknesses by taking advantage of opportunities ST Strategies Use strengths to avoid threats WT Strategies Minimize weaknesses and avoid threats Opportunities – O SO Strategies WO Strategies 1. With explosion of IT, internet use has increased 2. Personalized web services would realize more returns 3. Collaborate and partner with both domestic and foreign companies Marketing should be intense in developing countries with opportunities A marketer should research on gift holydays that fall at different times than those in the United States such as the Arab nation Emphasis should be placed on stable services other than retail Threats – T ST Strategies WT Strategies 1. Competition from e-commerce and regular retailers 2. Constantly changing technology 3. Malware, spyware, viruses, DOS can cost e-commerce sites Any partnership should be with strong competitors Membership cards should be promoted Amazon can purchase small e-commerce companies like joyo.com Amazon SWOT matrix (Porter, 2008) Porter’s five forces Porter (2008) developed the Five Forces model to illustrate biggest external and internal forces that drive competition in an industry. Apart from rivalry among existing competitors and threats of new market entrants, forces of supplier, threats of substitutes, and power of the buyer affects competition in any sector (Mintzberg, 1998). The dawn of IT has seen increased competition especially in internet and e-commerce. Threat of entry Amazon is a fast mover in online bookstore industry. Its eight years experience, intense capital investment, continuous upgrade of services by way of acquisition, alliances, and mergers, and endless development of technology bars other small firms from entering the industry. Any firm attempting to enter this market would have to build relationship with Amazon by bringing in immense amount of resources that may take time or seem impossible. The industry has moderate switching costs for customers. This gives breathing space for other players like eBay who will exploit auctioning markets and Wal-Mart who will utilize their site to underline affordable prices (Davidson, 2000). This element indicates untapped and low-valued niche market available to small players. Additionally there would be retaliation if Amazon diversified its products and services. Diversification strategy in the industry gives niche players an enforceable claim over the un-served market base. Bargaining power of buyers Customers are usually exposed to thousands of other retail websites available in the internet thus increasing buyer power in online retail industry. A situation where Amazon is not able to offer reduced prices motivates a consumer to migrate to other sites where prices are low. Nonetheless, customer-centric approach to meeting the needs of the customer inevitably assures Amazon a loyal customer base (Mann, 1997). Ability to use new tactic of satisfying customer guarantees that customers conducts their purchases from Amazon and no other place. Competitive rivalry Competitive rivalry in the industry is medium to high. Amazon faces stiff competition from Barneys, which is a retail store and Price Line with the highest employee per revenue contribution in the industry (Tiffany, 1999). Intense competitive rivalry is further intensified by high fixed and storage costs given the fact that firms have to stock inventory for making prompt delivery of an order. Product differentiation is also low except for auctioned product and exclusive rights granted by a supplier to sell a product. Bargaining power of suppliers Analysis of this variable focuses on relative size and concentration of suppliers in comparison to participants. The power of supplier is further explained by differentiation of inputs supplied, which in this case is authors’ work. Amazon does not run any production plant but depend on online sellers and partnerships like Target, Borders, or Office Deport. Suppliers of products for Amazon are also sellers in Auctions and xShops that then raise the power of supplier. It is important to note that switching costs is high in the virtual business environment. Threat of substitute The threat of substitute is high in internet and retailing industry. Companies with brick and mortar store have in addition online stores (Pottruck, 2000). Both aspects of brick and mortar and online stores act as substitute for Amazon.com. In a different occasion, Walmart.com, Lowes.com and Bestbuy.com acts as substitute for Amazon simply because products are spread throughout the internet. Wal-Mart, Barnes, and Noble books, which are Brick and mortar store, sell books and music, DVDs, software and other devices consequently acting as strong substitutes. Recommendation This report presents the following three recommendations to the management of Amzon.com. To capture more customers, an aspect of referees can be factored into online purchases. This can also be termed as snowballing since one customer is used to capture other potential clients. Customers making online purchase can be asked to rate the company’s services and subsequently highlight areas that need improvement. This goes along in improving customer’s services. Provide incentive such as discount to frequent customers. This would improve “repeat business.” Collaborate with all levels of education to build a reading culture. This is better done by advising educational institutions to assume e learning. This would increase demand for online research materials thus increase Amazon sales. To avoid seasonality of purchases, Amazon should carry out market studies then proceed to differentiate its products with respect to market descriptions and demand. Apart from providing Christian books, the needs of Muslims should also be catered for. Conclusion This paper has strategically analyzed Amazon.com by utilizing innovative analysis tools of SWOT and Porter’s Five Forces. The SWOT analysis mainly elaborates Amazon’s internal Strengths and Weaknesses and External Opportunities, and Threats. SWOT matrix presents graphically SWOT framework thus is a simplified version of a plan. Porter’s Five Forces was exploited to explain how rivalry among existing competitors, threats of new market entrants, forces of supplier, threats of substitutes, and power of the buyer affects Amazon competitive environment. Finally, two innovative recommendations were provided with intent of improving company’s performance. Reference List Cottrill, K., 2001. Online booksellers turning point. USA: H.W. Wilson Company. Davidson, S., & Kapsner, M., 2000. Bricks and mortar to the Internet. Journal of Internet Law. Retrieved March 10, 2011, from the World Wide Web: http://www.gcfw.com\. Hof, R., 2000. Suddenly, Amazon’s books look better. Business Week, 21st February, pp. 78–84. Linden, G., Brent, S., York, J., 2003. "Amazon.com Recommendations: Item-to-Item Collaborative Filtering," IEEE Internet Computing, 7(1), pp. 76-80. Mann, C., 1997. Volume business: What happens when the world’s best real-life bookstore takes on the world’s best virtual bookstore? Portland: Powell’s City of Books. Mintzberg, H., Quinn, J. B., Ghoshal, S., 1998. The Strategy Process. London: Prentice Hall Porter, M. E., 2008. "The Five Competitive Forces that Shape Strategy", Harvard Business Review, January, pp.86-104. Pottruck. D. and Pearce. T., 2000. Clicks and Mortar: Passion Driven Growth in an Internet Driven World. Carlsbad, CA: Penton Overseas, Inc. Seipel T., & Quinn, M. (2000). Ax falls at Amazon.com. USA: Knight-Ridder. Seybold, P., 1996. Customers.com. New York: Random House, Inc. Tiffany K., 1999. Barnesandnoble.com chief talks "clicks and mortar" strategy. (CNET News). 4 October 1999. Available at http://news.cnet.com/Barnesandnoble.com- chief-talks-034clicks-and-mortar034-strategy/2100-12_3- 266319.html#ixzz1FnPOzo4s. Accessed 6 March 2011. Read More