Amazon is recognized as the largest online retailer company in the world. The firm started as an online bookstore but later diversified into other products. Today, the company sells anything worth profit-making online. It operates in all parts of the world through localized portals and other global logistics platforms. Amazon leverages technology as its main competitive advantage that has enabled it to reap high economies of scale. Moreover, the company controls synergies between its internal and external operations to increase its profitability.
Its success has spawned competitors operating in the same industry. Its competitive advantage in the industry has been facilitated by its vision and mission statements that align business strategies with those of its employees. Amazon Inc.’s management has implemented stringent measures to ensure that both the mission and vision are achieved in the short and long-term operations (Phillips 156). The mission statement guides the strategic formulation of the firm to ensure it achieves global dominance in the online retail industry. The mission statement stipulates that the firm must focus on high-quality services. As the firm endeavors to fulfill its official statements, it empowers the e-commerce business for both the short and long-run global market.
Amazon has achieved this success due to its ability to differentiate its products on different websites. For instance, Amazon has a separate website in Germany, the USA, China, Mexico, and Italy. These websites allow customers in these states to sell products and services using their local languages. This strategy has increased the number of customers buying goods through then Amazon Inc.’s online portal because they can associate themselves with local languages. This kind of differentiation has enabled the firm to report high revenues in the last five years. For instance, in 2015, amazon was recognized as the most valuable retailer surpassing Wal-Mart in the US by market capitalization. In 2016, it was recognized as the fourth most valuable public company in the US. It has achieved this success due to its vast understanding of its customers and improved security. The world of internet exposes customers to a greater risk than personal shopping. Credit card data can be hacked while paying for goods online. Moreover, a supplier might send substandard goods to a customer. However, the company ensures that a customer’s credit card information cannot be obtained by a hacker or any other person. This kind of security guarantee encourages customers to opt for buying goods using their websites whenever they want to shop online.
Hill and Jones noted that managers must understand the external environment before making informed decisions (36). External environment analysis helps companies to understand factors that can affect their business but are beyond their control. The external environment of Amazon Inc. can be analyzed using Porter’s five forces model. The external analysis of the company defines various factors that affect e-commerce in the online market. Today, Amazon Inc. remains the biggest player in the industry. However, its executives must ensure regular evaluation of its external market using tools such as Porter’s five forces model to maintain its competitive edge in the industry. The model includes the threat of new entrants, substitutes, competitive rivalry, and the bargaining power of buyers and sellers.
Amazon Inc. has many competitors in the online retail market. The competitive rivalry aspect tells managers the impact of other firms offering similar products. This aspect is driven by the availability of substitute products, low switching costs, and aggressiveness of the company. Firms in the retail industry are generally aggressive, a situation that creates a strong competitive force. For instance, Amazon Inc. competes with other big rivals in the industry such as Wal-Mart that runs a competitive e-commerce website. Moreover, the company experiences the threat of new substitute products due to the high availability of these websites. The Wal-Mart brick and mortar bookstores are good substitutes to Amazon Inc.’s online stores. The competitive rivalry also increases due to the availability of low switching costs. Switching costs refer to the cost of changing from one e-commerce website to the other or the barriers to transfer from one retail store to the other. A critical analysis of Porter’s five forces model shows that the company must ensure the evaluation of its competitive capability in the online retail business.
Bargaining power of customers
The power of customers is high. The bargaining power of customers is enhanced by low switching costs and the high availability of substitute products. The low switching costs make it easy for customers to transfer from one retailer to the other. The high availability of substitute products also empowers customers to move from one retailer website to the other. For instance, many customers prefer to buy goods from Wal-Mart stores instead of buying them from Amazon because the stores are strategically located all over the US.
Bargaining power of suppliers
The bargaining power of suppliers is moderate due to their small population. This situation implies that a change in the cost of equipment can strongly affect the total costs of the company’s operations. However, since the moderate forward integration is low, it restricts the supplier’s effort. The forward integration refers to the ability of suppliers to control the sale of products to retailers.
The threat of new substitute product
The threat of substitute products in the retail industry is high. The threat of new substitute products is supported by low switching costs, which enable customers to transfer from one retailer to the other. For instance, customers have many choices when buying a product. They can decide to buy them from Wal-Mart stores that are strategically located all over the country or purchase them from Amazon Inc. The availability of substitute products and low costs poses a threat to Amazon Inc.’s online retail business.
The threat of new entrants
The threat of new entrants is high due to the high economies of scale and low switching costs. The switching cost of transferring from Amazon Inc. to a new retailer is very low. However, the high cost of brand development prevents new companies from entering this market (Hirt and Willmott 93). For instance, a new company is likely to spend billions of dollars to create a strong brand that competes with Amazon Inc. Moreover, the company enjoys high economies of scale that support high-profit margins (Hirt and Willmott 96).
Internal analysis of the company (SWOT Analysis)
The internal analysis of Amazon Inc. includes the evaluation and identification of the core competencies, resources, and capabilities that enable the firm to gain a competitive advantage over the other players in the online retail industry. Internal analysis can be accomplished using a SWOT analysis to weigh the strengths, weaknesses, opportunities, and threats to a firm that determines its competitive advantage.
Amazon Inc. has a strong value chain (outbound logistics) that is supported by more than 100 fulfillment centers across the globe. The company leverages technology on its outbound logistics using robotic technology to manage the shipment and receipt of products. Traditionally, the company has relied on FedEx and TNT to deliver its products. However, the firm has plans to lease 20 Boeing 767 airliners to make the delivery of its products more efficient. This plan is expected to cost the firm approximately $156 million annually. The willingness of the online retailer to invest such a huge amount of capital is interpreted as a move towards gaining independence from the cargo airlines. It has a strong capital base that enables it to market its products. Amazon Inc.’s marketing budget has been increasing in the last five years reaching $3.3 billion in 2014 (Ritala 236). The availability of a strong capital base enables the business to market its products effectively.
Although Amazon Inc. has remained competitive, its diversification strategy has “spread itself thin.” It means that the firm has been driving its diversification strategy away from its core competence of selling books. The company has also ventured into new focus areas that will improve its diversification perspective at the expense of losing its core competence. Moreover, it offers free shipment for its customers. This situation is likely to decrease the company’s profit margin both in the short and long run.
Since Amazon Inc. only operates in the online retail industry, there is a danger that its single-minded business will prevent it from meeting new demands in the emerging market. Therefore, its executives must come up with new strategies that will help diversify its market.
The company can increase its sales considerably if it can enroll in its payment system. The chief issue in the mind of most customers when shopping is privacy and security. If the company can enroll its payment system that will be secure, it will attract many customers. Moreover, the firm can get the most out of its capital base to roll more products on its brand instead of acting only as a forwarding site.
The main challenges facing Amazon Inc. are online hacking and identity theft because it leaves customer’s data exposed. Therefore, the firm must ensure it moves quickly to tackle customer threats. This plan can be achieved by developing its payment system that will offer guarantee security to customers. It also faces the threat of new substitute products offered by its competitors. For instance, Wal-Mart offers a wide array of substitute products that are expected to compete with those of Amazon Inc.
Analyzing business and corporate level strategies
According to Hoffman, Amazon Inc. applies a generic corporate-level strategy that is modeled around concentric diversification (7). It relies on leveraging technology capabilities with a cost leadership strategy. This strategy is aimed at ensuring that customers receive goods and services at the lowest price on their go-to-portal e-commerce shopping. This strategy has proven successful because the firm is now the largest online retailer. Moreover, the business has succeeded in all segments in which it operates. However, it is essential to note that the cost leadership strategy applies the law of diminishing returns. Therefore, managers should be cautious when applying it (Phillips 199). When using the Ansoff matrix, the company is placed on the cost of the leadership quadrant because it focuses on costs to increase its sales and profit margin (Duica and Duica 33). For instance, it offers steep discounts on its products to regular buyers through its Amazon Prime program. The firm pursues this strategy by waiving shipment fees and express delivery.
Phillips elucidated that Amazon Inc.’s strategy is also driven by the sources of its competitive advantage including technology and economies of scale (156). The firm utilizes various technologies such as “Big Data” to maximize revenues to match customer’s buying behavior. It has embraced this technology in a completely new way that allows it to offer new services.
However, its cost leadership strategy focuses less on product differentiation, implying that its business model is copied by “me-too” (Duica and Duica 34). This strategy has left many of its competitors in a price war. Since the firm focuses on price reduction at the expense of differentiation, its products also appear on other portals without changes in their product lines. Amazon Inc.’s cost leadership strategy is built around convenience aspects. Customers do not need to be physically present in their stores when purchasing a product. Instead, every aspect of a transaction takes place online. The company has implemented same-day deliveries in many countries.
Amazon Inc. has achieved this success due to its ability to differentiate its products on different websites. This strategy has increased the number of customers buying goods through online retailers because they can associate themselves with local languages. The external analysis of amazon shows that the firm has many competitors in the online retail market. As a result, the firm should rely on technology and a high capital base to offer unique services to its customers. For instance, it should consider developing its secure payment system. Security and privacy are among the top priorities of customers shopping online. The development of a secure payment system will encourage customers to buy more from the online retailer.
Duca, Anişoara and Mircea Constantin Duica. “Organizational Implications of the Cost Leadership Strategies.” Valahian Journal of Economic Studies vol. 5, no. 2, 2014, pp. 33-40.
Hill, Charles and Gareth Jones. Essentials of Strategic Management. Cengage Learning, 2012.
Hirt, Martin and Paul Willmott. “Strategic Principles for Competing in the Digital Age.” McKinsey Quarterly vol. 2, no.1, 2014, pp. 93-108.
Hoffman, Alan. Amazon.com, Inc: Retailing Giant to High Tech Player? Strategic Management: An Integral Approach. Cengage Learning 2015.
Phillips, Judah. E-commerce Analytics: Analyze and Improve the Impact of Your Digital Strategy (FT Press Analytics). Pearson FT Press, 2016.
Ritala, Paavo, Arash Golnam and Alain Wegmann. “Competition-Based Business Models: The Case of Amazon.com.” Industrial Marketing Management vol. 43 no. 2, 2014, pp. 236-249.