Overview
Amazon is a multinational corporation that operates in the online retail and technology industry. The firm offers a wide range of services, including e-commerce, digital streaming, and cloud computing. Over the years, Amazon’s market share in the industry has grown significantly, enabling the firm to rank as the 28th world’s biggest public companies in the Global 2000 list (Debter). Furthermore, the firm has been recording a surge in its revenues- $75.4bn within the first three months of 2020- and a potential increase in sales (Rushe and Sainato). Despite its dominance and success in the industry, Amazon remains susceptible to market forces and macroenvironmental factors that either strengthen or weaken its operations, performance, and profitability.
Porter Analysis
Risk of Entry
Risk of entry is among the aspects that may have a considerable effect on Amazon. However, an analysis of the market suggests that this aspect has a weak impact on Amazon’s operations because of barriers such as brand development and customer switching costs. As findings from previous research suggest, value and popularity are strongly correlated with repurchase intention on e-commerce websites (Bhuanaputra and Giantari 66). Notably, consumers are more willing to purchase products from well-known brands in the industry. Arguably, new market entrants would require a significant investment in brand development to provide consumers with the pleasure of buying goods on their platform to a similar degree as Amazon. Therefore, the high barriers to market entry facilitated by the high cost of brand development offset the risk posed by new establishments. The barriers also enable Amazon to protect its market share and generate more profits.
Rivalry Among Established Firms
Besides the risk of entries, rivalry from established firms in the industry is also an aspect that likely affects Amazon’s online operations and profitability. Unlike the weak threat of new entries, the rivalry from other firms strongly affects Amazon. The corporation operates in a consolidated industry characterized by a few large companies such as Walmart. Besides being large, the firms are also highly competitive, with their competition being based primarily on price, fast and reliable services to have a more robust market share. Furthermore, the firm has a diverse service portfolio, such as cloud computing and e-commerce, which exposes it to multiple sources of competition. Also, the low switching costs in the industry impose intense competition on the entity. As the literature suggests, switching costs can lock-in buyers and act as barriers to entry (Avgeropoulos and Sammut-Bonnici). In this context, consumers can easily purchase products from other online retailers without incurring any switching costs. The low switching costs and aggressive rivalry in the industry are potential threats to Amazon’s profitability.
Bargaining Power of Buyers
Consumer’s bargaining power is also another aspect that has a substantial impact on Amazon’s activities. Consumers derive their strong bargaining power from the availability of adequate market information and low switching costs. Consumers today have access to myriad sources of information on online retailers available in the industry through the help of advanced technology and social media. Therefore, they can easily find alternative retailers with better price deals and services. Besides, as noted, consumers are likely to incur low switching costs, which prevents them from being locked-in to one retailer. The high consumer bargaining power is a potential threat to Amazon’s profitability in the online retail sector.
Power of Complement Providers
The fourth competitive force that impacts Amazon is the intensity of complementors. Complementors are firms that offer goods and services that complement products and services provided by Amazon. For example, Amazon operates solely as an online retailer that lacks physical stores, except for its warehouses, where goods are stored before delivery. Therefore, consumption of the firm’s products highly relies on consumers’ access to complementary products such as devices with internet connectivity. Complement providers associated with Amazon have intensive power, which poses a significant threat to the latter’s profitability.
Threat of Substitutes
Additionally, the threat of substitutes has a significant effect on the environment in which Amazon operates. This aspect of the external forces substantially impacts Amazon due to the low switching costs, availability of substitutes, and lower prices. Most notably, industrial analysis shows that consumers incur low costs of switching from one retailer to another. Therefore, consumers can choose to purchase products from Walmart rather than Amazon. Besides, there are close substitutes such as brick and mortar stores with better price offerings, such as Walmart Stores, where consumers can make their purchases. Overall, the low switching costs and the availability of less costly substitutes intensifies the threat to Amazon’s profitability and market share in the industry.
Bargaining Power of Suppliers
The sixth force that impacts Amazon is the bargaining power of suppliers. Unlike other forces, this aspect has a moderate effect on the company and is mainly shaped by the limited number of suppliers and forward integration. As an e-commerce retailer, Amazon relies on supplies to conduct its operations, implying that a significant change in the prices of its essential components can increase its cost of operations. Nonetheless, Amazon also adopts forward integration, which enables the firm to control the prices offered by its suppliers. Forward integration offsets the high operational costs triggered by the limited number of suppliers, allowing Amazon to generate more profits.
Industry Life Cycle
Based on the industrial analysis, it seems that Amazon fits within the mature phase of the industry life cycle. According to scholars, this stage of the cycle is characterized by slower growth and more competition, increased consumer knowledge, and greater technological maturity, and competition becomes increasingly focused on prices and service quality (Sabol et al. 639). Sharma also adds that a decline in industrial profits is a common feature of the maturity stage (253). All these traits are visible in the industry in which Amazon operates. For example, the sector is characterized by aggressive competition from small and large firms such as Walmart.
Also, competition in this industry has mainly been based on price and services. For example, Amazon has been enhancing its services by introducing new features in its site such as Amazon Prime Day, which enables consumers to save significantly on multiple items, receive free delivery, and access to other services offered by the retailer (“Prime Day 2020”). Also, despite e-commerce having a large share of the total global retail sales, profits in the industry have been declining due to the intense price competition among established firms. For example, it is estimated that Amazon experienced a boom in sales in early 2020 but a 29% decline in profits in the same period (Rushe and Sainato). Overall, the current trends in competition and profitability suggest that Amazon fits within the maturity stage of the industry life cycle.
Macroenvironmental
Socio-cultural Factors
Socio-cultural factors are significant determinants of Amazon’s performance in the industry. These factors either present opportunities or threats to the firm’s operations. The most visible social aspect that impacts Amazon is changing consumers’ purchasing behavior. According to emarketer, e-commerce constituted an approximately 2.29 trillion-dollar market in 2018 and was anticipated to reach 4 trillion dollars by 2020 (cited by Rahman et al. 2). These statistics reveal a growing trend towards online shopping among consumers, probably because it is the best solution in today’s busy life. Fortunately, this social factor presents an opportunity for Amazon to generate more sales and profits because a majority of its product and services are offered online.
Technological Factors
Besides socio-cultural aspects, technological factors also have a significant impact on Amazon’s operations. Among the technological factors that relate to Amazon are the progressive technological advancements in the modern world. It is worth noting that technology is the epicentre of Amazon’s operations. Therefore, the ongoing technological advancement in the world is an opportunity for the entity to enhance its online operations and make them more efficient for use among consumers.
However, technological advancement is also a threat to Amazon’s integrity, which is vital to the entity’s customers. Most notably, consumers who shop online submit critical details on the corporation’s website to complete their online purchases. Unfortunately, the ongoing technological advancement has seen a rise in cybercrimes, which can easily compromise the firm’s integrity and risk the access of the client’s information to other parties with malicious intentions.
Furthermore, the high rate of technological advancement exposes Amazon’s systems to technological obsolescence, whereby some components of its system are frequently replaced by newer and enhanced versions in the market. On the one hand, technological obsolescence is a threat to the company because it imposes additional operations costs of updating the internal information systems. On the other hand, technological obsolescence is an opportunity for the firm to improve its services relative to its competitors and make its system more appealing to consumers.
Political Environment
The political environment in which Amazon operates also impacts its performance in the industry. The most visible trend in this component is the continued political stability among a majority of the countries, which serves as an opportunity for the entity to expand its operations, both online and physical warehouses in other states. However, the company also faces potential threats to its profitability and sales from political clashes between countries. For example, Loeb notes that the US-China war has, in recent times, slashed margins and pushed up prices for sellers and consumers who use Amazon. Although Amazon reaps maximum benefits from global political ties, it is also significantly affected by political instability between nations such as the United States and China.
Conclusion
Synthesis of information gathered regarding Amazon reveals that the firm is subject to numerous factors that either provides an opportunity for the firm to thrive or a threat to its overall profit, performance, and market share. As identified in the paper, the significant issues that affect Amazon’s performance are threats from rival firms in the industry, the power of complementors, the high bargaining power among buyers, and the threat from close substitutes. Also, information reveals that the existing macroenvironmental factors such as technology, socio-cultural and political aspects are both a threat and an opportunity for the firm to thrive in the industry.
Works Cited
“Prime Day 2020.” Amazon, www.amazon.com/primeday. Accessed 24 September 2020.
Avgeropoulos, Stephanos, and Sammut-Bonnici, Tanya. Wiley Encyclopedia of Management. John Wiley and Sons Ltd, 2015.
Bhuanaputra, K.W, and Giantari, Ketut. “The Effect of Perceived Brand Leadership Towards Consumer Satisfaction and Repurchase Intention on E-Commerce Website.” Russian Journal of Agricultural and Socio-Economic Sciences, vol.97, no.1, 2020, pp. 66-73.
Debter, Lauren. “Amazon Surpasses Walmart as the World’s Largest Retailer.” Forbes, 15 May 2019, www.forbes.com/sites/laurendebter/2019/05/15/worlds-largest-retailers-2019-amazon-walmart-alibaba/#791658d04171. Accessed 24 September 2020.
Loeb, Walter. “Tariffs are Starting to Hurt Sellers on Amazon.” Forbes, 12 Sep. 2019, www.forbes.com/sites/walterloeb/2019/09/12/tariffs-are-starting-to-hurt-sellers-on-amazon/#3abcb4397b31. Accessed 24 September 2020.
Rahman, Mohammad Anisur et al. “Consumer Buying Behavior Towards Online Shopping: An Empirical Study on Dhaka City, Bangladesh.” Cogent Business and Management, vol. 5, no. 1, 2018, pp. 1-23.
Rushe, Dominic and Sainato, Michael. “Amazon Posts $75bn First-Quarter Revenues but Expects to Spend $4bn in Covid-19 Costs.” The Guardian, 30 Apr. 2020, www.theguardian.com/technology/2020/apr/30/amazon-revenues-jeff-bezos-coronavirus-pandemic. Accessed 24 September 2020.
Sabol, Andrija et al. “The Concept of Industry Life Cycle and Development of Business Strategies.” Management Knowledge and Learning International Conference, 2013, pp.635-642.
Sharma, Harshinder. “Product Life-Cycle Management: Concept and Stages.” Indian Journal of Research, vol. 5, no. 10, 2016, pp. 252-253.
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