Amazon Case Study

Rameeza Khan - 63165

Amazon.com Inc. Five Forces Analysis (Porter’s Model)
Amazon.com Inc. continues to lead the online retail market as a result of integrating business
challenges, such as the ones identified in this Five Forces Analysis, into the firm’s strategy
development. Michael Porter developed the Five Forces Analysis model as a tool for the external
analysis of business organizations. In this case of Amazon, the external factors define the
conditions of the e-commerce industry environment, with focus on the online retail market.
However, other markets are also considered, as the company has operations in consumer
electronics, digital content distribution, and online services, such as cloud computing.
Amazon.com Inc. remains the biggest player in the e-commerce market. To keep this industry
position in the long term, the company must regularly evaluate the external factors in the online
and non-online industry environments, such as through tools like the Five Forces Analysis
framework. The forces of competitors like Apple, Google, Microsoft, Walmart, and Home
Depot can be effectively tackled through strategic formulation that accounts for the influences of
the five forces on Amazon’s e-commerce competitiveness.
Amazon.com Inc. enjoys the top position in the online retail market. Nonetheless, external
factors identified in this Five Forces Analysis indicate possible reduction of market share and
business performance because of strong competition involving large multinational retail and
technology firms. Amazon’s generic competitive strategy and intensive growth strategies must
evolve as the online market develops and expands to include the participation of more companies
and customers around the world.

Overview: Amazon’s Five Forces Analysis

Amazon.com Inc. competes against a variety of firms, including smaller online retail stores and
large firms like Walmart. The global scope of the e-commerce business also exposes Amazon to
a diverse set of external forces. Thus, the company must ensure that it remains resilient amid
changes in the conditions of the online retail industry environment. The following are the
intensities of the external factors affecting Amazon, based on Porter’s Five Forces Analysis
model:
 Competitive rivalry or competition (strong force)
 Bargaining power of buyers or customers (strong force)
 Bargaining power of suppliers (moderate force)
  Threat of substitutes or substitution (strong force)
 Threat of new entrants or new entry (weak force)

Competitive Rivalry or Competition with Amazon.com Inc. (Strong Force)

Amazon competes against strong competitors. This aspect of Porter’s Five Forces Analysis
model tackles the effects of firms on each other. In the case of Amazon.com Inc., the following
external factors are responsible for the strong intensity of competition or competitive rivalry in
the online retail industry environment:
 High aggressiveness of firms (strong force)
 High availability of substitutes (strong force)
 Low switching costs (strong force)
Retail firms are generally aggressive, and they exert a strong competitive force against each
other. For example, Amazon.com Inc. directly competes against giants like Walmart, which has a
significant and expanding e-commerce website. Amazon also experiences the strong force of
substitutes because of their high availability. For instance, Walmart’s physical or brick-and-
mortar stores are substitutes to Amazon’s online retail service. Other brick-and-mortar
bookstores and smaller retailers also compete against Amazon. Furthermore, low switching costs
impose a strong force on the company. Low switching costs correspond to low barriers for
consumers to transfer from one retailer to another, or from one company to a substitute provider.
Based on the external factors in this aspect of the Five Forces Analysis of Amazon, competition
must be a strategic priority to ensure the company’s long-term competence.

Bargaining Power of Amazon’s Customers/Buyers (Strong Force)

Amazon.com Inc.’s vision statement and mission statement highlight the company’s customer-
centric approach to e-commerce business. This aspect of Porter’s Five Forces Analysis model
determines the influence of consumers on firms and the industry environment. The following
external factors support the strong intensity of the bargaining power of customers in affecting
Amazon:
 High quality of information (strong force)
 Low switching costs (strong force)
 High availability of substitutes (strong force)
Consumers have access to high quality information regarding the services of online retailers and
the products they sell. This external factor affects Amazon.com Inc. in terms of the ability of
customers to find alternatives to the company’s online retail service. In relation, the low
switching costs make it easy for consumers to transfer from Amazon to other firms, such as
Walmart. Also, the high availability of substitutes further empowers consumers to shift from one
retailer to another. For example, instead of purchasing on Amazon’s e-commerce website, a
customer can easily go to one of Walmart’s stores, which are strategically located throughout the
United States. The external factors in this aspect of the Five Forces Analysis show that Amazon
must consider the strong bargaining power of buyers as a major factor in addressing business
challenges in the online retail industry environment.

Bargaining Power of Amazon’s Suppliers (Moderate Force)

Suppliers control the availability of supplies or materials Amazon.com Inc. needs for its e-
commerce operations, such as hardware components for information systems. The influence of
suppliers on the online retail industry environment is outlined in this aspect of Porter’s Five
Forces Analysis model. Amazon experiences the moderate intensity of the bargaining power of
suppliers based on the following external factors:
 Small population of suppliers (strong force)
 Moderate forward integration (moderate force)
 Moderate size of suppliers (moderate force)
The small population empowers suppliers to impose a strong force on Amazon.com Inc.’s e-
commerce business. For example, changes in prices of equipment from a small number of large
suppliers could directly impact the company’s online retail operational costs. However, the
moderate forward integration limits suppliers’ actual effect on Amazon. Moderate forward
integration equates to a moderate degree of control that suppliers have in the sale of their
products to firms like Amazon. Moreover, the moderate size of most equipment manufacturers
limits their influence on the company. Based on this aspect of the Five Forces Analysis of
Amazon, the external factors emphasize the moderate significance of suppliers as a strategic
determinant in the online retail industry environment.
Threat of Substitutes or Substitution (Strong Force)
Amazon.com Inc. competes with substitutes in the online retail market. This aspect of Porter’s
Five Forces Analysis model identifies how substitutes affect the industry environment. In the
case of Amazon, the following external factors support the strong intensity of the threat of
substitution:
 Low switching costs (strong force)
 High availability of substitutes (strong force)
 Low cost of substitutes (strong force)
Amazon continually addresses the strong force of substitutes, which threaten the e-commerce
company’s performance. The low switching costs show that customers can easily transfer from
the company to other retailers. For example, consumers can easily decide to buy from Walmart
stores or other retail establishments instead of buying from Amazon.com Inc. The high
availability of substitutes and the low costs of their product offerings further increase the
influence of substitutes against the company. Thus, the external factors in this aspect of the Five
Forces Analysis of Amazon.com Inc. show that substitution is among the priorities in the
company’s strategies for long-term success in the online retail industry environment.

Threat of New Entrants or New Entry (Weak Force)

New firms potentially reduce Amazon’s market share in online retail. The effects of new entrants
are considered in this aspect of Porter’s Five Forces Analysis model. Amazon.com Inc.
experiences the weak intensity of the threat of new entry based on the following external factors:
 Low switching costs (strong force)
 High cost of brand development (weak force)
 High economies of scale (weak force)
Amazon’s consumers can easily transfer to new firms, thereby empowering new firms to impose
a strong force against the company. This condition is due to low switching costs, or the low
negative effects of transferring from one provider to another. However, the high cost of brand
development in online retail weakens the influence of new entrants on the performance of
Amazon. For example, it would take years and billions of dollars to create a strong brand that
directly competes with the Amazon brand. In addition, the company benefits from high
economies of scale that make its e-commerce business strong. As such, new entrants need to
achieve similarly high economies of scale to compete against the company. Based on the
external factors in this aspect of the Five Forces Analysis, new entrants are a minor strategic
issue in Amazon’s performance in the online retail industry environment.

Recommendation
Amazon must address the major forces of competition, consumers and substitutes, based on the
Porter’s Five Forces Analysis of the business. It is recommended that the company must address
the strong force of competitive rivalry by emphasizing competitive advantage and strengths of
the e-commerce organization. For example, the company must continue boosting its brand
image, which is among the strongest in the industry.
Amazon.com Inc. can address the external factors linked to the strong force of the bargaining
power of buyers by focusing on service quality. For instance, counterfeit reduction can improve
customer experience in using the company’s e-commerce website. Another recommendation is
for Amazon to counteract the threat of substitution by making its service more attractive. For
example, the company must continue enhancing the usability of its website to optimize user
experience. These recommendations aim at increasing Amazon’s competitiveness and potential
for long-term success in the online retail industry environment.