Strategic Analysis of Amazon

Amazon Strategic Analysis

Introduction:

Amazon, the leading e-commerce brand of the world, led by Jeff Bezos was first incorporated in Washington in 1994 and again in Delaware in 1996. For the first time, its website was launched in 1995. The brand has continued to see very fast growth and has come a long way since its inception. Apart from being a global e-commerce brand, Amazon is also a leading cloud player and is growing its strengths in the cloud industry. Customers have always been a central focus of Amazon’s business strategy and this strategy has kept leading the brand to success. Competition has kept intensifying in the E-commerce industry and Amazon has retained its customer focus in order to remain competitive. However, the brand has continued to grow its investment into innovation and research to provide the customers a better overall experience. despite its low operating margins, it continues to remain investors’ favourite. Memberships have grown faster since the launch of prime and Prime video continues to drive customer attraction and retention. Alexa enabled devices are the best selling across entire Amazon and 2017 had brought more good news for the retail giant. In terms of hardware sales too, it was a great year when Amazon sold tens of millions of Echo devices, and Echo Dot and Fire TV Stick with Alexa. For fashion as well as music, Amazon is an attractive destination for millions all around the world. Tens of millions of paid customers shop for music at Amazon Music. The brand is also growing through acquisitions and continuously investing in technology to change the face of the retail game. However, challenges too abound and apart from the rising competition and regulatory pressures, there are other challenges in the way of Amazon’s growth.

Amazon strategic analysis

SWOT Analysis of Amazon 2018:

Strengths:

– E-Commerce leader –

Amazon is the leading e-commerce brand of the world. The brand has exceeded the 100 million mark in terms of prime memberships globally. It shipped more than 5 billion items with prime globally in 2017. Apart from the number of customers, the line of products and variety have also kept rising at Amazon.

– Significant cloud player –

Apart from being an e-commerce player, Amazon is also a leading player in the cloud industry. Amazon Web Services is a leading provider of cloud based services.

– Customer base & loyalty –

Amazon has maintained a very large customer base of loyal customers. Prime is driving the addition and retention of customers. Prime video is  major source of new memberships for Amazon. Other reasons behind the high level of customer loyalty include customer experience, quality of customer service and products as well as investment in technology.

– Global presence –

Amazon is a global brand with sellers and buyers from around the globe. There are sellers from every state in United States and 130 different countries listed on Amazon selling their products to a global audience.

– Large range of products :-

Amazon sells a very large range of products through its website. The website sells hundreds of millions of unique products. In several categories including fashion and music Amazon has become the most favourite destination for the shoppers. The product range has continued to grow based on the increasing number of third party sellers from all over the world.

– Strong financials :-

Another major strength of the brand is its financial performance. In the recent years, its sales have grown very fast. Even if the operating margins are weak, the brand acquires very large sales resulting in high income. Sales grew by more than 40 Billion dollars in 2017 as compared to 2016. Its 2017 net sales touched 177.9 Billion as compared to 136 Billion last year. Net income in the same period grew from 2371 million to 3033 million.

– Focus on innovation :-

Amazon has maintained a strong focus on innovation so as to provide its consumers with the best experience. Apart from providing them with a great shopping experience online the brand also invests in AI and other areas in modern technologies so as to retain its competitive advantage. Technology is a major source of competitive advantage for an e-commerce brand in the modern era. However, apart from managing a great website, it is also important to provide the customers with a unique experience. However, not just e-commerce but Amazon also invests in innovation in the cloud business. Its total R&D expenditure for the year 2017 amounted to 22.6 Billion USD which was more than 6.5 Billions higher than the same in the previous year. In this way, it has continued to raise its investment in R&D every year.

Weaknesses:

Weak operating margins :-

Operating margins of Amazon have remained weak traditionally. Apart from  a small rise in the last two quarters they had remained below 3% since the middle of 2016. In last quarter of 2017, operating margins rose to 3.5% and then in the first quarter of 2018 to 3.8%. Compare it with Facebook’s 45% and that is quite  major difference.

Product failures :-

In past, some of the products made by Amazon did not achieve the kind of success they were expected to.

Opportunities :-

Diversification :-

Diversification provides unique opportunities of growth for Amazon. Apart from e-commerce, it is operating in cloud industry. The brand can diversify into new and related technological areas that can afford it faster growth.

Forward integration :-

Forward integration can also be a method to achieve higher growth rate. Apart from developing its own logistics and distribution network, the brand can open physical stores as it opened fulfilment centers to grow faster and to get closer to the customers.

Acquiring new businesses :-

Acquisition of new businesses also offers some faster opportunities of growth. Recently Amazon acquired Whole Foods market and another company named Ring that operates in the are of Home Security. Amazon can similarly expand into new areas of business that can help it grow its business and the brand faster.

Releasing new products :-

Releasing new products like its Alexa can help the brand achieve faster growth. However, due to intense competition from the likes of Google, the brand would like to remain careful about what products it is trying to build.  Product failures often result in losses.

Threats:

Heavy competition :-

Competition both in Cloud services and e-retail is a major threat for the brand and it has kept intensifying. Apart from eBay and Flipkart, Alibaba is also adding to the intensity of competition. Moreover, there is competition from the physical retail brands that is also causing higher pressure on Amazon. Walmart’s entry into e-retail has intensified the threat. In cloud industry, there is solid competition from Microsoft, Oracle, Salesforce and other leading cloud services brands.

Regulatory threats :-

Legal and regulatory pressures are also creating major trouble for the big technology brands including Amazon. Especially it is the EU where the environment has kept changing fast and where top technology brands have faced the biggest challenges including large fines. In 2017, Amazon was hit by a fine of 250 million Euros in back taxes.

Stronger dollar :-

A stronger dollar worldwide has also kept affecting the profits of major international and technological brands including Amazon.  Changes in foreign currency exchange rates can also have a potential negative impact on the profits of big businesses like Amazon.

Dependence on American markets :-

For a large part of its business, Amazon still depends on the American markets. Its North America net sales in E-commerce were close to double the net sales of the brand internationally. In 2017, its net sales in North America reached 106 Billion dollars whereas that  from the international sales was 54.3 Billion dollars. Amazon must focus on expanding its international business to reduce its dependence on the American markets.

PESTEL analysis:

Businesses operating in an international environment are subject to several pressures that can be economic, political, social or technological in nature. These forces are known as PESTEL forces. PESTEL is an acronym for political, economic, social, technological, environmental and legal. Moreover, by understanding these forces managers can formulate better strategies that can help them effectively manage their business, markets and customers. A PESTEL analysis of Amazon inc.:

Political:

Political forces are of utmost importance in the 21st century. It is because the role of political forces and government agencies in the context of business has kept growing.   Government agencies are now highly aggressive in terms of controlling businesses which is evident from the massive fines EU had made some technology giants pay recently. It is not just for the protection of consumers but some of these moves are just to control the bargaining  power of large businesses from rising further. Globally, the political environment can vary from country to country and while some are less open to foreign direct investments, the other are more open to it. A business friendly political environment helps international businesses grow whereas in many countries international businesses may face an environment hostile to their growth. Stable political environment offers international businesses more opportunities of growth whereas unstable political environments can hamper business growth by destabilising supply chains and distribution networks. Other types of disturbances also happen due to political chaos or geopolitical threats like terrorism. Amazon is also affected by these factors and around the world trade policies and trade relationships of US also affect sales and growth to some significant extent.

Economic:

Economic factors are central to the business in an international environment. The importance of economic factors can be understood from the factor that several large businesses of the world had reach the verge of bankruptcy during the economic recession that ended just some years ago. Economic fluctuations can affect the businesses and their sales and profits to a large extent. High level of economic activity leads to higher level of employment and in turn higher disposable income. In such situations, people have higher income at their dispense to spend on lifestyle and other items leading to higher sales for e-retail brands like Amazon. In such periods, the retail brands enjoy higher sales and profits. Some economies are still wrestling with economic fluctuations but most have emerged from the recession and its fifths. A fast rowing Asian economy also offers major new opportunities for brands like amazon and it is the reason that Walmart bought  a large and controlling stake of around 70% in Indian e-commerce brand Flipkart. Overall, the central role of economic factors in the context of international business cannot be denied.

Social Factors:

Sociocultural factors too have acquired a major role in the context of business. Not just in terms of business and marketing strategy but they are now seen as playing an important role in customer service and retentions strategies as well. The same strategy cannot be applied to all markets/regions and that is why businesses use localised business, marketing, sales and even customer service strategies. Amazon has different websites for different markets that cater to the local customers. Sociocultural factors affect marketing strategies since ads that are more suited to the local culture and society are more successful at connecting with the local customers.

Technological Factors:

Technological factors are now more important in the context of international business than ever. It is because of the growing role of technology in terms of sales, marketing and customer service. technology controls everything from online transactions to marketing and level of customer service. It is why brands need to invest in advanced technology to keep ahead of their competitors and to provide their customers with a distinct experience. Amazon has invested  a lot in in its websites and apps and apart from that it also invests in Research and development. This expenditure has continued to grow every year and is now past 22 Billion dollars. Digital technology and AI are changing the world of marketing and customer service and how brands engage their customers. Overall, technology is now a major source of competitive advantage for any large brand and Amazon itself is a major technology player.

Environmental Factors:

Sustainability and environmental factors are now central to business and large businesses are devoting more and more resources to make their business and supply chains more sustainable. It is not just about environmental protection but also about creating a positive image and building reputation through investment in green technology ad environment. Amazon is investing in sustainability in several areas from waste management to recycling and renewable energy. Apart from that it is investing in partnerships that are targeted at environmental protection around the globe. Its wind farm in Texas has 110 wind turbines, which is also the largest one owned by Amazon. All this investment is meaningful because apart from bringing down the carbon footprint of the brand, it helps it minimise wastage, save resources as well as cut down costs and create a green and happy ecosystem. More and more technology brands are investing to gain higher self dependence in terms of energy. Investing in sources of renewable energy is helping them reduce their dependence on nonrenewable sources and derate a safer and clever system. Concerted efforts by the large businesses could reduce the overall pressure on the entire planet.

Legal Factors:

Legal factors are affecting businesses and especially the large businesses more than ever before. The large businesses to remain on the radar of the legal agencies all the time. This was particularly evident in the case of EU. EU has taken action against several of the large businesses and slapped major fines on some of them in the last few years. Even Amazon got to be at the receiving end in one similar case when EU slapped a fine in millions in from of back taxes. Apart from taxes, there are several areas in which a large web of laws is frequently troubling international businesses. From  labor to product/service quality and environment, there are several laws that the companies have to care for because non compliance in all these areas results in very large fines and financial losses.

Business strategy and competitive advantage:

In this era of heavy competition, brands cannot be successful without having a strong business strategy and more than one sources of sustainable competitive advantage. At the centre of Amazon’s business strategy is customer convenience. The brand has seen global success by being the most customer focused e-commerce brand. Being successful in the 21st century requires maintaining a continuous focus on customers’ choices and demands and being first to respond to it. Amazon sells a very large range of products from its website whose number ranges in hundreds of millions. In this way, it caters to a very large range of customers’ needs worldwide. Accessibility and affordability are also two notable aspects of its business strategy. Being  a larger e-retailer, it is able to create price pressure on  its suppliers and pass this benefit to its customers. Technology is also a very important part of its business strategy in both segments including e-commerce and Amazon web services. AWS is a leading cloud service provider. On its e-retail platform as well, the brand maintains heavy focus on creating a competitive advantage by providing higher level of convenience to its customers. It continues to invest in AI and digital technology for a superior shopping experience. Its investment in research and development is among the highest in the technology industry. This is however, essential to sustain its growth rate since the competitors have also grown aggressive in terms of  technology and marketing. The brand uses several channels to attract customers. Its introduction of Amazon prime has also proved to be highly effective in terms of attraction and retention of customers. The kind of growth that Amazon has achieved within a short period was not possible without having a few sources of competitive advantage. The most important sources of Amazon’s competitive advantage are:

– Innovative technology

– largest product range

– customer service

– pricing (free shipping)

– popularity and customer loyalty

While many of these sources create sustainable advantage for the brand, some of them are also sources of temporary advantage that Amazon is trying to strengthen by investing in R&D.

Five Forces Analysis of Amazon Inc :

Bargaining power of suppliers:

The bargaining power of Amazon suppliers is low as is the case with most big brands. This is because while these suppliers are scattered and small in size, Amazon holds higher bargaining power owing to its large size and brand image. The suppliers being very smaller in size as compared to Amazon are unable to dictate their terms and it is mostly the e-commerce brand that has the upper hand.

Bargaining power of customers:

The bargaining power of Amazon customers is moderately high. Even if an individual customer does not make substantially large purchases attracting new ones as well as retaining individual customers is an important focus at Amazon.  Apart from marketing and customer service, the brand also spends a lot on customer engagement and retention. These things are of paramount importance in this era of cutthroat competition. Moreover, each customer has several options before him including physical retail and is a well informed customer. These are the most important factors that have led to bargaining power in the hands of the customers in the 21st century. Their bargaining strength gets moderated to some extent by factors like Amazon’s brand image,  quality of products and customer service, investment in marketing as well as Research and development and most importantly its global presence.

Threat from substitute products:

The threat from substitute products or brands mainly comes from retail and e-retail brands like walmart, Ebay etc in case of Amazon. There are several large retail brands in USA as well as some commerce brands like Ebay. Apart from that in other parts of the world too retail and retail brands like Flipkart and Alibaba are competing with Amazon. Amazon has a very large range of unique products seeing on its website whose number ranges somewhere in hundreds of millions and which is a critical leverage for the brand. However, a large range of these products are also available with other brands like Walmart, Costco, Ebay, Flipkart, Alibaba etc. The overall threat from the substitute brands is moderate because of Amazon’s brand image, large product range and global presence.

Threat from new entrants:

The threat from new entrants in the e-retail industry is moderately low. New brands can enter with a not so significant investment because of increased availability and affordability of technology required to start an retail brand. However, to create a unique brand like Amazon or even one of its smaller competitors is difficult. First there is sufficient competition in the industry and next there is a large investment in creating a big brand and growing it on a global scale. From technology to human resources and marketing, there is a very large investment in all these areas. Apart from that, there are other risks including financial that can lead to failure in a highly competitive environment. Legal and regulatory risks can also make the game difficult which also prevents new brands from exerting. Moreover, brands like Amazon have been able to manage a very high level of customer loyalty which also deters new brands.

Intensity of competitive rivalry:

The intensity of competitive rivalry in the commerce industry is growing with the entry of retail brands like Walmart entering commerce. Apart from it, Amazon has several other notable competitors like Ebay, Alibaba group, Flipkart etc. All these e-commerce websites are adding to the intensity of competitive rivalry in the industry.   Walmart and Costco have also entered e-retail which has led to increase in the level of competitive rivalry among the existing brands.

Value Chain analysis of Amazon Inc :

  

Primary activities:

Inbound logistics: Fulfilment by Amazon is a program rolled out by Amazon through which its suppliers can ship their products to an Amazon fulfilment centre and the products can be stocked at these centres and then packed and sent to the customers when orders online. There are several advantages of FBA for the Amazon suppliers and they can benefit a lot apart from enjoying increased sales due to higher visibility.  Amazon provides its suppliers free and fast delivery options. the products stocked by the suppliers at its fulfilment centres are eligible for delivery through Prime.

Operations: Amazon has its business operations spread over several countries worldwide. Since 2011, the band has invested $150 Billion worldwide in  its fulfilment networks, transportation capabilities, and technology infrastructure including AWS data centres. Amazon has divided its business operations into three segments that  include North America, International, and Amazon Web Services . These segments also reflect how the company evaluates its business and its performance.

Outbound logistics: Amazon receives products from its suppliers at its fulfilment centres and ships to its customers worldwide from there. It has several fulfilment centres around the world including several in Asia from Singapore to India. These fulfilment centres are a critical part of its distribution network and enable it to ship products bought online within  day to its consumers.

Marketing & sales:

Amazon also maintains heavy focus on marketing and sales. If its marketing expenses have risen fast in the recent years then it is because of the rising competition from various players in the industry. Amazon uses several marketing channels for the marketing of its brand and products. Its uses targeted online marketing channels, like its sponsored search, Associates program, social and online advertising, television advertising, and other initiatives to direct consumers to its websites and increase sales and retention. Increased spending on online marketing channels as well  as higher payroll and related expenses have led to higher marketing expenditure for Amazon. In 2017, its expenditure in marketing efforts was higher than 10 Billion dollars.

Support Activities:

HRM:

Amazon has a workforce of 566000 part time and  fully time employees as of December 2017. Employment levels and number of employees is also affected by seasonality among other factors. there is very high level of competition for talented employees including computer engineers and IT professionals. Amazon therefore maintains heavy focus on employee hiring and retention. The growth of the brand is heavily dependent on the availability of talented employees.

Technology:

Technology is also a key factor driving the growth of Amazon. The brand continuously makes heavy investments in technology so as to prove its consumers with a  abetter experience. Investing in technology is key to faster growth, enter consumer experience as  well as a better brand image. It is an era of personalised experiences as well as convenience and the brands that can provide the highest level of convenience to their customers acquire very high level of popularity. It is also why the level of expenditure research and development has continued to grow at Amazon. the brand is one of the top spenders on R&D in the entire industry. In 2017 its expenditure on R&D was 22.6 Billion dollars.

Infrastructure:

A company’s infrastructure plays an important role in its growth and success. Amazon has also maintained a huge and global infrastructure spread over several countries. Its total assets were worth 131 Billion dollars in 2017.

Procurement:

Procurement and supply at Amazon are managed through the contracts with suppliers. Amazon is committed to the success of its millions of suppliers worldwide and provides them tools and resources to sell successfully through its website. while it is generally easy to become an Amazon certified seller, one needs to follow the business agreement between the brand and the sellers.

Core Competencies of Amazon:

The core competencies of Amazon include the following:

Largest product range: Amazon sees a very large range of products from its website whose number ranges in hundreds of millions.

Technological innovation: Amazon has retained heavy focus on technological innovation and apart from websites in several nations and apps, it has continued to invest in technology for better customer service and experience. Investment in research and development has also continued to aid the growth of Amazon Web Services.

VRIO Analysis of Amazon Inc. :

Important resources and capabilities of Amazon:

Brand image and equity: Amazon’s customer focused rand image is a major source of competitive advantage for the brand. It has managed to create high level of trust based on the quality of products and services it sells.

large customer base: Amazon has a very large customer base from all over the world which is a major advantage for the e-commerce brand.

global presence: The global presence of the brand is also a source of major advantage.

customer loyalty: Amazon has also managed a high level of customer loyalty which works to retain a very large percentage of customers for the life time.

Technological innovation: Technological innovation is also a source of competitive advantage for the brand since it enables Amazon to offer  a unique and greta customer experience. The brand has continued to increase its expenditure on research and development.

Huge product range: Amazon sells a very large range of products whose number ranges in hundreds of millions.

Resources/capabilities

Valuable

Rare

Inimitable

Exploited

Implication

Brand image/equity

Yes

Yes

Yes

Yes

Competitive advantage

customer base

Yes

Yes

No

Yes

Temporary advantage

global presence

Yes

Yes

No

Yes

Temporary advantage

customer loyalty

Yes

Yes

No

Yes

Temporary advantage

Technology

Yes

Yes

No

Yes

Temporary advantage

Product range

Yes

Yes

Yes

Yes

Competitive advantage

Financial analysis :

Amazon’s financial performance has continued to improve as its net sales have continued to grow worldwide. While the Americas are still its main market, the brand is also growing fast overseas. The operating margins at Amazon have remained consistently low, but still they have grown a little in the recent quarters reaching 3.8% in first quarter of 2018. Net Sales or revenue in the same period grew to 177.87 Billion dollars in 2017 rising from 136 billion dollars in 2016. The operating income of the brand in the meantime fell to 4106 million dollars from 4186 million dollars. Net income during the same period rose to 3033 million dollars from 2371 million dollars. The brand’s performance has grown even better in the first quarter of 2018. Its net sales in the first quarter rose to 51 billion dollars from 35.7 billion dollars during the same period last year. Net income ha slash more than doubled compared to the first quarter of 2017 rising to 1629 Million dollars from 724 Million dollars.

Suggestions:

– Amazon must focus on increasing profit margins by releasing more of its own products. Alexa enabled products have helped it gain sales and profits in 2017. Introducing more of its own products could help push operating margin higher.

– Asian markets provide significant opportunities of growth and should be focused upon.

– Diversification and forward integration also provide significant opportunities of growth.

– HRM is another significant area where Amazon needs to place its focus.

Sources:

Amazon 2017 Annual Report

Amazon 2018 first quarter financial results.

https://www.cnbc.com/2017/10/03/eu-to-fine-amazon-millions-in-back-taxes–report.html
https://blog.aboutamazon.com/sustainability/sustainability-by-the-numbers
https://services.amazon.in/services/fulfilment-by-amazon/benefits.html
https://services.amazon.in/
https://www.recode.net/2018/2/1/16961598/amazon-jeff-bezos-record-profit-11-quarter-q4-2017-earnings
https://economictimes.indiatimes.com/small-biz/startups/newsbuzz/amazons-dinky-3-8-operating-profit-margin-pales-in-front-of-facebooks-45-but-investors-love-bezos/articleshow/63935230.cms
Abhijeet Pratap

Abhijeet has been blogging on educational topics and business research since 2016. He graduated with a Hons. in English literature from BRABU and an MBA from the Asia-Pacific Institute of Management, New Delhi. He likes to blog and share his knowledge and research in business management, marketing, literature and other areas with his readers.