Five Forces Analysis of Amazon Inc.
Amazon Inc Five Forces Analysis
The retail industry has grown fast since the recession and Amazon is at the lead in this growth story. The e-retailer sells and ships to more than 185 countries globally. 2015 proved to be a very happy turn for the e-retailer. Amazon’s network is pretty big and is spread throughout the world. The reason that Amazon has found rapid growth is because of the brand’s focus on customer service. Apart from that technology and a growing world economy have also helped it find success and generate unmatched sales.
Here is a porter’s five forces analysis of Amazon that discusses how the various forces are shaping competition in the retail industry and what is Amazon’s position with regard to these forces. The five forces model was developed by Michael E Porter. It is a well-known analytical model that can be used to analyse the level of competition and the forces that are affecting competition in the industry. The model is sued widely across the industry for the purpose of strategy formulation.
Bargaining power of Amazon suppliers:
The bargaining power of Amazon’s suppliers is low to medium. It is because Amazon always has the upper hand when it comes to its supply chain. While the number of Amazon suppliers is big, these suppliers have to do business according to the rules set by Amazon. These suppliers have to follow the code of conduct that Amazon has set. Some of the core areas that are Amazon’s focus in terms of supplier relationships are as follows:
- Health and safety in production areas and any living quarters
- The right to legal wages and benefits
- Appropriate working hours and overtime pay
- Prevention of child labor or forced labor
- Fair and ethical treatment, including non-discrimination
These suppliers have to follow the supply chain standards set by Amazon. Moreover, for any supplier forward integration would be difficult. However, Amazon can easily switch or find new suppliers. For any product it always has several options. Based on all these factors Amazon’s suppliers' bargaining power is low to medium.
Bargaining power of buyers:
The bargaining power of buyers at Amazon is medium to high. Amazon focuses a lot on customer satisfaction and product quality. Switching costs for the customers are low and the number of Amazon competitors has grown in these years. Physical retail is also creating pressures. Every customer has sufficient information when searching for products online and can make his choice based on the available information. It is why customer retention remains an important focus area for the e-retailer. The bargaining power of Amazon buyers is high.
Threat of substitute products:
The threat of substitute products for Amazon is high. While a number of other brands have also entered online retail, people can also buy from the physical retailers. The only major competitive advantage of Amazon is its excellent customer service apart from its brand name. The customers can easily switch from one brand to another.
Threat of new entrants:
The threat of new entrants is low for Amazon. It is because the proliferation of digital technology has brought several changes to the retail industry. A number of new brands have entered e-retail. Now it is easier to build an e-retail business model with the available technological resources. From Alibaba to Flipkart and e-bay several national and international brands have emerged that are competing with Amazon. Growth in digital technology has reduced the barriers to entry. However, to build a brand like Amazon is very difficult because of the marketing and other expenses. Not just this, the problem is that there are other strategic factors too which would require the kind of dedication that Jeff Bezos has showed to build a brand.
Rivalry in the industry:
The level of rivalry in the industry is high because the number of players in e-retail has grown and there is also immense competition from the traditional retail brands. Walmart and Costco are important competitors of the e-retail giant. Rivalry also gets intensified in the retail industry by several other factors. It is not just the big brands, but also the small brands that are fighting for market share and creating competitive pressure. Some big non US brands have entered the US market and some more and planning to enter and expand their presence fast. So, how the level of competition will continue to increase for Amazon is not unimaginable.