Amazon.com and Porter’s Five Forces Essay
Amazon.com and Porter’s Five Forces
In the early 1990s, the Venture Capitalists and Banks reviewed business models of books, CDs, electrical appliance retailers which were majorly confined to brick and mortar stores and simple operations. But they would be surprised to view the business model of Amazon.com Inc, which has used the internet to gain competitive strategic advantage and personify most of innovation metaphors. This analysis of Amazon.com Inc has Porter’s five forces model, which consist of Supplier’s Power, Customer’s Power, Threat of New Entrants, Threat of Substitutes and Degree of Rivalry, respectively, being conscientiously used in respect to our chosen company, to determine whether Amazon has benefitted in terms of competitive advantage by its different-than-others business model, or has it not. The rest of this research answer is organized as follows: first we shall look at why we chose Amazon, and then we shall study the five forces given in the same progressive order as above. This is finalized by our conclusion, where the research answer is stated clearly.
Being one of the largest online retail companies in the world (Forbes), Amazon.com has clearly stated its position in the dominant market analogies. Emerging in the early 1990s (the era of .com boom) the firm was one of its own kinds of innovation. The firm sells everything from books, DVDs to kitchen appliances and jewellery. The firm’s other operations are: providing content production and computing services to various firms. So, all this was basic data about the company which looks great on paper, but the quality in Amazon which led us to choose it as our company was persistence towards transforming. To survive and grow in today’s complex business world where words like stability don’t matter anymore, you need to change and transform constantly according to situation and time, which Amazon has done very nicely.
First of all, it survived through the dot com bust due to it having an innovative business model with less cost formula. Then to expand, they went further than books to bring in most of easily shippable goods. Amazon came through once again to satisfy a new customer – IT community, which required new resources, and a new business model. This was in 2002. In 2007, it further innovated to launch the kindle eBook reader (which currently is a tablet computer). This product required Amazon to be a hardware producer as well as digital media software. And the success of Kindle showed that Amazon had the ability to respond to market needs, and to transform, not just once, but time and time again, to deliver the demanded product for both customer satisfaction and growth of its business. These support our choice of choosing this company.
There are two major supplying fields for Amazon’s (according to the sales structure of the firm), namely; electronics and book sectors. With those suppliers related to supplying books in terms of their bargaining power have proved to be at a minimum (or limited) level ’cause of low concentration that directly adds to the firm’s value overtime. The out-coming factor to such relativity is large number of book sellers present in the market. In such manner, Amazon is readily open to select its own suppliers for books once there is a distortion of material nature of things. Other sector that the firm’s sale figures are heavily dependent upon is electronics. In such case the bargaining power for electronics suppliers is relatively high.
The only reason present for this explanation is the low costing structure that Amazon presents for its electronic goods to sell. In such manner they are not collecting their deliveries straights from the parent companies rather they opt for its second dealers, which have more bargaining power (price mechanism that outcry’s the related market dependences). The nature for such power is the presence of fewer dealers for the supply or if the firm wants to switch to other suppliers then their pricing could be different (generally higher than market price). On an overall we can say the bargaining power of suppliers fluctuates from low to mid-high (taking overtime factor into account that directly proportions the book sector)
Such power is generally related in the manner how a customer selects, carry forward and considers his / hers buying options. In terms of online retailing, customers are having high bargaining power. If they see other sites selling at different costing they’ll shift the choice of not selecting Amazon.com. Sometimes customers are over possessive in terms of product selection. So they want hand touch to their selections. In accordance to that online retailers are at a diminishing level as there are markets to look for (such could also be a case of buyer’s customisation). Another way to look for such scenario is the manner in which the industry provides product quality. Amazon.com being regarded as a superior firm in terms of product quality, so its costumers purchase more on it rather going to the markets.
This also adds value to the firm by creating more customers over the years. Considering the fact that Amazon.com do not operate any of its retail outlets, there are saving, accordingly. It’s in the business nature of the firm to transfer that saving directly to buyers in terms of low pricing of its goods, and in that causative approach Amazon.com enhances its value. Being more customer centric firm, it satisfies more customers and due to that reason the firm has more offering than any other industry in such field. To conclude, the above reasoning for the customer’s power to bargain and industry’s ability to attract more, we say that it fluctuates mid to high.
Threat of New Entrants
Majorly this relates to barrier to entry into the current segment of the market (online retailing). In such field (at eh present financial scenario) threats of new entrants are low. Beating Amazon.com is at its performance scale is a tough job for any new .com enterprise. It may take years for a new firm to get into form working in present financial world (concerning stock market fluctuations, investment hedges etc.). For any E-commerce firm to develop requires a start-up strategy and stable working environment; that is only possible when there a suitable financial induction and better approach to day-to-day problems. Strong distribution and supply network is the basic necessity for an online retail company. The manner in which big firms such as Amazon.com, eBay, Alibaba; operates, they have evolved overtime to get their goods to the end consumers. Geographic factor is better for the firm’s competitive advantage.
Amazon.com withstand a better than any other firm, by operating as product and service differentiation to attain maximum locality it can. (a view in accordance to the working nature and size of Amazon.com) http://www.wikiwealth.com/five-forces-competitor:amazon:geographic-factors-limit-compe Pricing structure and capital requirements always pose a extradition to new retailing firms as these costs associated to them are usually high. An economy of scale is widely looked upon a changing mechanism for a firms operating level. Amazon.com has this factor in high nature as it is able to limit its cost governing operations which in case of new entrants is high. Governmental policies could sometimes hold a newly formed company not the start up or disrupts its operations in middle as it might not be in the proper nature of working (legal concerns) (Chapter 2 page 85 book – exploring corporate strategy)
Threat of Substitutes
Having market for goods diversified, there are number of options available to purchasers while selecting a particular choice of their own. Online stores, direct outlets, discount shops, stands; goods can now be purchased anywhere and any-time (no need for going online every-time; but yes the comparison can be made). Taking example for book purchase; such can be bought from number of book shops or news-stands at much more cheaper price (taking a margin of interest). Other could be music selection; iTunes, radio stations or recording on one’s own are close substitutes for online purchase. Only thing to argue here is the nature of physical presence or being virtual about a shopping item. By taking such notice, threat of substitutes in case of Amazon.com is high.
Degree of Rivalry
Market adjusts in accordance to the compelling nature of firms to attract consumers. More product diversification leads to empowering market to produce rivalry among providers of it. Amazon.com being of the key player in such market capture faces strong competition from its rivals (such as eBay, Alibaba, Barnes & Nobel, Wal-Mart etc.) Growth rate [in %] (Source: NASDAQ)
Barnes & Nobel
Amazon.com hold a strong future forecasts in terms of growth rate. (could also be a measure to predict industry development towards market behaviour) But when we consider sales revenues into account for the year 2012-13 http://www.forbes.com/sites/walterloeb/2013/07/24/alibaba-a-threat-to-amazon-ebay-walmart-and-everyone-else/ Source: Forbes
In billion $
There is a clear presentation of how market can integrate companies in terms of revenue capturing in the same field of online retailing. This could either be short-term or long-term depending upon attempts to gain dominance over one another (chapter 2 page 85 book – exploring corporate strategy) In terms of entry and exit barriers, there is a moderate rivalry between firms. The explanation to that is the profit making what the investors see in retail sector. https://www.extension.iastate.edu/AGDM/wholefarm/html/c5-200.html
Consequently, Amazon.com stands on a better scale of performance as when it started operating there were low exit barriers that made the company to add to its value. But these current times, investments and barriers are getting more complex that puts pressure on firms which are stepping into recent marking to perform above. The firms that hold strong grounds (as mentioned EBay, Alibaba etc.) are giving intense rivalry to Amazon.com.
Porter’s Five Forces Model
Threat of New Entrants
Threat of Substitutes
Degree of Rivalry
Viewing the tabular conclusion gets us to further conclude that Amazon.com Inc has increased its competitive advantage, in a good degree, one might say.