External Environment (EFAS)
Natural/Physical
Concern for natural sustainability is growing on a global scale. The increasing number of natural disasters and cataclysms taking place in the USA and abroad pose a threat to Amazon’s financial performance. Overconsumption, shipping operations, product packaging, and other activities conventionally associated with retail and e-commerce in particular are considered to have a detrimental impact on the ecological state of the planet. As a result of these ecologically unfriendly operations, Amazon may be perceived negatively by potential environmentally-conscious customers. Nevertheless, the rising public interest in environmental programs and green technologies provides opportunities for Amazon. To attract a greater number of new consumers who prefer a low-carbon lifestyle, Amazon should further implement more well-developed and innovative green technologies and higher sustainability standards.
Socio-Cultural
The social macro-environment in which Amazon operates (both in North America and on other continents) is primarily associated with opportunities rather than threats. First of all, consumers are becoming increasingly interested in shopping online. According to recent statistics, the number of consumers “who make at least two online purchases in a three-month period” has increased by 3% between 2015 and 2016 (Farber). This trend may allow Amazon to outperform its brick-and-mortar rivals such as Walmart. In 2016, “Amazon posted $82.7 billion in sales, compared with $12.5 billion for Walmart, and that chasm in dollars keeps getting wider” (Faber). It means that the potential for Amazon’s growth is strong. Moreover, a trend toward growing consumerism is becoming prevalent in many developing countries. Therefore the company can benefit by entering emerging markets where people have access to the Internet.
Economic
There is economic stability in the majority of developed countries where Amazon operates. This factor increases the company’s likelihood of success and reduces the barriers to expansion in those markets. Additionally, more growth opportunities are appearing in developing economies as disposable income continues to increase there (Greenspan). However, it is important to take into account that the current situation in the global stock market is characterized by a high degree of uncertainty, which makes it difficult to forecast whether any new investment and expansion projects will be profitable enough (Amazon.com 10). Additionally, Bowman et al. (2014) note that conventional capitalist economic models no longer meet the needs or suit the purposes of the present-day business environment. For this reason, economies that traditionally implement regular capitalist structures, i.e., the USA and the UK, etc., should consider revising their approaches to conducting business through innovation and research. Since Amazon was founded in a capitalist context, it can significantly benefit from investing in market-creating innovations.
Geo-Political-Legal
Legal compliance is essential for the sustainability of any business in the world. Since Amazon operates in a global environment, it should take into consideration both domestic and international trade and commerce regulations, as well as consumer safety and data security standards. Some of the laws affecting Amazon’s activities are the European Sales of Goods Act, the US Federal Trade Commission, the UK data protection act, and so on. In case of noncompliance, the firm can experience substantial financial losses and damage to its reputation. Some cases of Amazon’s noncompliance with international law and safety standards have already been reported. For example, an investigation recently conducted by the Federal Trade Commission revealed that Amazon’s sellers used deceptive discount strategies to promote and sell a portion of its products, while the actual prices for those items were higher (Bartz). This incident and similar ones can be detrimental to the company’s image. In contrast, regulatory compliance can lead Amazon to long-term success and profitability.
Technological
The major threat Amazon may face in the current macro-environment is rapid technological obsolesce. This trend puts pressure on all enterprises that depend on the efficacy of their technological assets. At the same time, the need for rapid technological advances offers some opportunities as well. For instance, investment in the development of online infrastructure and information technologies can help Amazon gain new competitive advantages. It is likely that the company has sufficient resources to move in this direction because the USA, as well as many other developed countries where the company operates, is associated with a strong capacity for innovation. For example, in 2016, the USA occupied the fourth position in the Global Innovation list and outranked such technologically advanced countries as Japan and Germany (World Intellectual Property Organization, 2017). It is worth noting that many innovation projects in the USA are market-oriented and aimed at commercialization. Additionally, the US innovation system is integrated into international research endeavors, which leads to better global visibility and a higher quality of technological research.
Task (Industry)
Stage of Development
The e-commerce industry reached a state of consolidation when such multi-category players as Amazon began acquiring smaller niche enterprises with the purpose of diversifying their product range. Online sales have drastically increased since 2014 and amounted to 1.86 trillion US dollars in 2016 (“Retail e-Commerce Sales Worldwide”). It is expected that the numbers will only grow in the future and will be twice as high by 2021. The popularity of online shopping will increase not merely due to a rising Internet population, but also because the major actors in the industry are investing in the development of the required support ecosystem by offering secure transaction systems, improved customer service, and so on. Moreover, globalization trends are contributing to changes in people’s lifestyles. As more and more individuals cannot afford to spend time on offline shopping, e-commerce provides a convenient solution for them.
Threat of New Entrants
In the online environment, consumers can easily switch from one retailer to another, providing almost unlimited opportunities for new market entrants. However, the development of a brand can be particularly costly. Therefore not all new businesses will be able to compete with such large and well-known giants as Amazon. Currently, the company greatly benefits from economies of scale and the significant volume of outputs. Only those new entrants that can attain similar economies of scale can be as successful and profitable as Amazon. Based on these factors, it can be stated that the threat of new entrants has a rather moderate impact for Amazon.
Bargaining Power of Buyers
E-commerce is associated with customers’ high bargaining power. It is defined by such factors as easy access to credible information about various services and products, low switching costs, and high availability of substitutes. This means that the online environment provides consumers with all the necessary information about Amazon and its competitors. Consumers can compare them and choose the item that most suits their needs and preferences. At the same time, consumers do not face any significant barriers to switching from one retailer to another, as doing so requires minimum effort and usually does not entail any extra expense. Lastly, since there is a large number of players in e-commerce and their offerings may be somewhat similar, a customer does not have to stick to one retailer but may instead select products based on pricing, quality, and other added values.
Threat of Substitutes
Amazon faces a strong threat of substitutes. Similar to the bargaining power of customers, substitution is defined by low switching costs. When substitutes of the same quality are offered by Amazon’s rivals at lower prices, the risk of losing consumers increases. Therefore, the enterprise should aim to address this threat through various strategies focused on prioritizing customers, creating value, and so on.
Bargaining Power of Suppliers
In contrast, the bargaining power of suppliers in relation to Amazon can be considered low because the company’s suppliers are highly fragmented. On the other hand, the population of Amazon’s suppliers is smaller than, for example, that of eBay’s suppliers. It means that a slight change in prices of the products supplied by one firm can manifest itself in greater operational costs. Based on the combination of these two factors, the bargaining power of Amazon’s suppliers can be defined as moderate.
Rivalry
The level of rivalry and competition in the industry is high. Amazon’s major rivals include Alibaba, eBay, Walmart, and other similar firms. Potential competitors are present in such industries as online, offline, and multichannel retail; publishing and interactive media; web search; e-commerce services; logistics; information technology; consumer electronics and telecommunication, etc. (Amazon.com 4). Since many of these companies offer similar items, to maintain its leading position, Amazon should use smart pricing, marketing, and product diversification strategies to attract new buyers.
Porter’s Five Forces: Summary.
EFAS Summary.
Internal Environment (IFAS)
Structure
Amazon.com has a hierarchical organizational structure like the majority of large enterprises across the globe. The company’s CEO, Jeff Bezos, is at the top of the managerial hierarchy, while the representatives of the senior management team are placed below him and are responsible for various vital aspects of business performance as well as reporting. They govern seven major corporate segments including HR, IT, etc., which also have their own heads. Such a formal hierarchical structure with centralized decision-making makes it possible to control the large corporation and regulate collaboration between departments and international facilities more effectively than an informal, linear structure could. The hierarchical structure allows each organizational team to operate autonomously. While innovation is regarded as one of the primary organizational values, an organizational structure and architecture associated with rigidity and lack of flexibility can be detrimental to entrepreneurial endeavors within Amazon.
Culture
Amazon is a customer-oriented company. The vision statement provided on its website is as follows: “It’s our goal to be Earth’s most customer-centric company, where customers can find and discover anything they might want to buy online” (Amazon.com). To meet the interests of consumers and suppliers better, Amazon actively analyzes the market and engages in ongoing communication with its partners. The company inquires about the preferences and difficulties of consumers/suppliers in every new market and aims to implement the gathered knowledge through localization strategies. Additionally, when it comes to employee culture, the enterprise values agility and innovation the most, and the management attempts to encourage the development and utilization of these qualities in subordinates. This allows Amazon to pursue its formulated strategic objectives more efficiently. However, the prioritization of customer focus over employee considerations can affect the staff’s morale in a negative way.
Resources
Marketing
Amazon follows the “glocal” principle. This model is consistent with the company’s current objectives, as it implies global development and internationalization along with consideration of local consumers’ needs. These efforts are supported by an extensive diversification of products and a low pricing strategy, which aim to benefit customers. In 2014, over a half of Amazon’s total sales came from computers and mobile devices, electronics, and general merchandise, while 43% were from media including books and DVDs (Hoffman 9-4). Considering that the company operates in a great number of segments including web services, content-related delivery, etc., it is targeting a broad group of potential consumers. Nevertheless, it mainly focuses on higher-income people (Versaw). In this regard, Amazon’s largest US competitor, Walmart, has more opportunities to remain profitable as it targets lower-income customers, who constitute a larger proportion of the whole population. It is worth noting that the current frustration-free packaging initiative that aims to decrease the output of non-recyclable waste is part of Amazon’s marketing strategy (Hoffman 9-6). This initiative is helping the enterprise to improve its corporate image to some extent.
Finance
According to Amazon’s Annual Report, since 2012, the enterprise has shown a steady growth in net sales from US $61.093 billion to US $135.987 billion (17). At the same time, eBay’s net revenues in 2016 amounted US $8.979 billion, and the Chinese platform for online retail, Alibaba, had US $15.461 billion (eBay; “Annual Revenue of Alibaba Group”). The data on Amazon’s financial performance indicate that it remains highly competitive.
To evaluate existing drawbacks in Amazon’s financial performance, the management thoroughly evaluates the reports and utilizes standardized audit tools. The findings help them formulate appropriate financial goals, which are stated in the Annual Report. The goals include sustainable growth in free cash flows through efficient management of operating capital, reduction of variable costs, and leverage of fixed costs (Amazon.com 19). These goals are consistent with the organizational objectives. For instance, by decreasing variable costs on a per unit basis, Amazon will be able to decrease prices for customers. In this way, financial management seems to be well coordinated with strategic management endeavors.
The major financial risk Amazon faces is related to fluctuations in foreign exchange rates because, after conversion, the actual operating results may differ from the expected ones. With an increase in international operations, Amazon’s exposure to exchange rate fluctuations has grown proportionally.
Key Financial Ratios: Profitability.
R&D
Amazon seeks to “invest efficiently in several areas of technology and content, including AWS, and expansion of new and existing product categories and service offerings, as well as in technology infrastructure to enhance the customer experience and improve our process efficiencies” (Amazon.com 19). It means that investment in R&D will increase in the future as the company plans to recruit more computer scientists and designers, as well as software and hardware engineers. These R&D initiatives significantly support Amazon’s internationalization and global expansion processes, as well as the cross-functionality of its internal systems and infrastructures. This means that technology plays a significant role in the enterprise’s strategic management as Amazon strives to improve the consumer experience through innovation and advancement.
Operations and Logistics
Amazon was among the first enterprises to comprehend the importance of fast shipping. As stated by Simpson, “with more than 100 warehouses in the US alone, it has kept accelerating its delivery – from 48 hours, to next day, to the evening of the same day.” To attain high delivery speed, Amazon utilizes co-sourcing and outsourcing arrangements in some countries, although the number of such arrangements is rather insignificant and does not harm the company’s competitiveness. Along with this, the company continues to innovate its logistics services through implementing predictive purchasing and investment in technology and robotics, including automated aircraft, which may be effectively utilized in a number of European and Asian countries with looser regulations than the USA.
The major risk in this area of performance is related to Amazon’s fulfillment network and inventory optimization both by the company itself and by third parties. As stated in the Annual Report, inventory risks are associated with “seasonality, new product launches, rapid changes in product cycles and pricing, defective merchandise,” etc. (Amazon.com 12). This trend can negatively impact the enterprise’s operating outcomes. Thus, another of Amazon’s goals is the enhancement of prediction systems to avoid overstocking and understocking.
HR Management
Amazon aims to attract new talent and retain a motivated employee base. However, the level of staff retention in the company is rather low. Low retention policies are related to Amazon’s management style and the overall nature of the business: it is more focused on performance and customers. As a result, even well-paid, talented people may feel disengaged and dissatisfied because their interests are not considered to a significant extent, and their contributions are not recognized. To address this problem, the firm launched an education program that aimed to support underperforming employees in doing and feeling better within Amazon. This initiative may help the company manage its HR more efficiently. As for staff diversification, Amazon has not been as successful in this regard either. It remains a male-dominated organization. At the same time, one of Amazon’s largest rivals, Google, is characterized by an inclusive environment and support for employees from diverse demographic backgrounds − one of the major aspects that made it the best company to work for in 2016 (“Fortune 100 Best”).
IT Systems
Amazon runs automated operations on a large scale and therefore an advanced IT infrastructure is a must for its efficiency. “The IT infrastructure of the organization has been built in such a way that could handle more than millions of operations and also handles queries and issue of more than half of the volume of sellers” (Demir 12). Facing the risks associated with storing and securing the financial and confidential information of a large number of customers, the company found a solution for implementing a customer relationship management module that allows for integrating personalized information storage and purchasing trends analysis with marketing and advertising campaigns. One of the most recent innovations has involved the company beginning to utilize its AWS, which is based on cloud computing. This technology helped Amazon to scale up its web service use and stabilize traffic fluctuations (Williams).
IFAS Summary.
Analysis of Strategic Factors (SFAS)
SWOT Summary/Overall Assessment.
Review of Mission and Objectives
Amazon’s mission is as follows: “We strive to offer our customers the lowest possible prices, the best available selection, and the utmost convenience” (Amazon.com). Moreover, it aims to be the most customer-oriented company in the world, offering anything customers may want to purchase online. Based on this, it is clear that the organizational objectives include global reach, a highly diversified selection of products, and customer prioritization.
It seems that not all of the identified strategic factors are effectively addressed by the company in its current strategic management, and some of them have only recently started receiving proper consideration. For example, in an attempt to embrace an expansion opportunity, Amazon entered India about a year ago. This achievement may be considered only a first step in its further expansion plans. Moreover, Amazon continues to diversify its product lines and enter into new segments, i.e., logistics services, online television, etc. At the same time, some strategic factors may interfere with the firm’s growth.
Low staff retention and job satisfaction rates, as well as reported cases of noncompliance with legal regulations, may harm the corporate image and consequently divert consumers to more accountable rivals. Therefore it may be advisable for Amazon to pay more attention to diverse stakeholder groups besides its consumers. It is recommended that the management should include the objective of considering various stakeholders’ interests in its current list of strategic aims. An expected outcome of doing so may be more ethical and socially responsible corporate behavior and an improved organizational image. Developing a positive organizational/brand image and increasing customer loyalty are ways to overcome the threat of substitute products. Moreover, doing so can result in long-term economic growth as well as greater consumer attraction.
Strategic Alternatives and Recommended Strategy
Strategic Alternatives
While Amazon’s current corporate growth strategy through acquisition, product expansion, and diversification at the business level can be considered successful, there are a number of possible improvements it can achieve at the functional level. Three viable alternatives aimed at enhancing the functional side of performance and addressing the newly formulated objective may include the shift towards green supply chain activities, implementation of high-retention policies, and transformational leadership.
Transformational Leadership Strategy
The management utilizes a strategic leadership model that emphasizes scale, automation, and efficiency (Heskett). For a long time, managers at Amazon had to fire the least efficient workers every year (Sajjan et al. 5). Such practices likely result in an unfavorable and stressful environment, leading to employee distrust and dissatisfaction. Transformational leadership, in contrast, can help develop a more positive employee culture by empowering subordinates through “inspirational motivation (expressing the vision of the organization to empower followers), intellectual stimulation (encouraging followers to come up with novel solutions) and individual consideration (responding to followers’ individual differences)” (Sajjan et al. 3). The major advantage of this strategy is that it will help Amazon eliminate employee negligence and reduce extra expenses associated with recruitment practices. The disadvantage of transformational leadership may be that it is time consuming because it requires taking into account individual preferences and needs, and the development of particular qualities, mindsets, and skills in Amazon’s managers.
High-Retention HR Strategy
Many research findings indicate that employee satisfaction directly affects customer satisfaction. Moreover, when the company treats its workers well, consumers tend to perceive it positively. Thus Amazon’s current low-retention HR policy and culture must be revised, and appropriate motivation, training, and empowerment system should be developed. The example of Costco’s high-retention strategy shows that it may have such advantages as “high productivity, high employee retention, low employee replacement costs, low prices, substantial profit” (Heskett). At the same time, while a low-retention strategy may result in the dismissal of talented workers, a high-retention strategy can lead to the retention of poorly performing employees. Thus to minimize this risk, appropriate staff education and monitoring practices should also be implemented.
Green Supply Chain Strategy
Green logistics management concerns both the issues of ecological sustainability and organizational cost efficiency. The major advantage of this strategy is that it responds to stakeholders’ environmental pressures (Cosimato and Troisi 107). Moreover, it may lead to cost savings and better product quality, a better corporate image, and the creation of barriers for new market entrants (Cosimato and Troisi 106). It may be especially important for Amazon since it has entered the logistics industry and started to offer delivery services. The major disadvantage of this alternative is that although it can result in savings in the long run, it requires significant investment in modifications to the logistics infrastructure. Moreover, it can be successfully implemented only in technologically advanced countries.
Recommendation
It is recommended that Amazon should at least partially implement a green supply chain strategy because this initiative may allow the organization to embrace the opportunities associated with increasing interest in sustainable business practices, exploit its technological and innovation capacities, and increase competitiveness. To some extent, doing so may help the company deal with service substitutes and even facilitate entry into new markets, as its offerings will have a unique value.
Implementation
As was mentioned above, Amazon already utilizes sustainable packaging solutions. Other major green supply chain activities that it may practice at different phases of the strategy implementation are responsible waste disposal, ecological product purchase, reduction of energy consumption and natural resources waste, utilization of cleaner transportation methods, and recycling. These operational changes can be facilitated if Amazon institutionalizes the corporate social responsibility (CSR) principles. To follow these principles, the company should design and enable a mechanism for the systematic consideration of consumer, social, ecological, ethical, and legal issues at distinct operational levels. Many instruments used in the CSR framework are closely linked to corporate culture and the overall profile of a company’s activities, including those related to supply chain management.
The most common of them are the development of meaningful partnerships (Walters and Anagnostopoulos 418); cause-related and sustainable marketing (Fodness 10); and ethical corporate governance, including a set of practices aimed at fostering responsible investment, such as ecological and social labelling of products (placement of additional CSR-related ethical information on packages), etc. The incorporation of CSR into the organizational culture and a shift towards greener technologies require staff training and ongoing evaluation of internal regulatory systems. Thus the development of an efficient knowledge management strategy is also required to foster the desired changes. Such a system will assist in collecting information and centralizing different kinds of data that may be disproportionally scattered across the company. In this way, it will be possible to increase capabilities for knowledge generation and exploitation.
In spite of the multiple difficulties Amazon may face during the implementation stage, this strategy can be considered feasible. The minimum period for the project implementation is approximately 5-7 years. It is apparent that such massive changes require the involvement and approval of senior management. However, the new tactical approaches, operational standards, and policies might be designed by an interprofessional team of managers composed of representatives from logistics, financial, HR, and other relevant departments.
Evaluation and Control
Amazon’s advanced IT can substantially assist in monitoring progress and accumulating analytical data. Additionally, to evaluate the ongoing project processes, the company can utilize such control techniques as variance analysis aimed at evaluating the difference between the planned outcomes and the actual results. Variance analysis can be implemented for multiple areas of concern: costs, time frames, start and finish points of any activity, achievements, gained benefits or losses, competence, and managerial effectiveness. However, to avoid the inadequate use of data analysis, it is important to take into account a great number of subjective influences that may affect labor efficiency and output measures, i.e. cultural and regional conditions, a project’s characteristics (size and complexity), team motivation, and organizational changes that may impact the work rhythm, etc. Additionally, it may be recommended to develop a motivation and reward system that would encourage departments and employees to comply with the new standards and recognize their contribution to change.
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