Analyse the internal competitive environment of Amazon and asses the impact of porters five forces on the giant online retailer.

• See also Amazon Pestel and Swot 2018

4.0 Amazon Porters Five forces 2018

4.1 Threat of entry/ barriers to entry

In any industry, threat of entry will depend on the extent of the barriers to entry (Johnson et al 2008). In the case of Amazon, threat of entry is very low because the retail giant has created a monopoly where ever it operates in that competitors have had no option but to operate through its platform. The company has also used below - cost selling to crash and then absorb new competitors like Zappos and Quidisi  (Mitchell 2018), this would make it hard and costly for any new company to try to enter and compete due to expected retaliation of Amazon thus making the threat of entry very low. In USA, Amazon captures every 1$ of 2$ that Americans spend on line, the e-commerce giant’s website has dominated online retail sales attracting half of all USA shoppers and hosting thousands of third party sellers (Mitchell 2018).

In UK, Amazon has also dominated the market commanding 29.7% followed by Sainsbury’s and Tesco at 6.5 battering the survival of most British high street retailers (Chambers 2018). Retailers like New Look, M&S among others have been forced to close most of their stores (Cox and Musaddique 2018).

4.2 Bargaining power of buyers

When it comes to Amazon, the bargaining power of the buyer is low considering the fact that the retailer has dominated the market and online retail sales with its low costs making it hard for buyers to shift to other retailers. According to Mitchell (2018), by 2014, almost 40% of people looking to buy something online were skipping search engines and going directly to Amazon. This grew to 55% by the fall of 2016 and has continued to grow. The fact that most of its competitors have also not had an option but to operate on its platform shows how powerful Amazon is, at making the bargaining power of the buyer low.

4.3 Bargaining power of suppliers

According to Johnson et al (2008), suppliers can have so much bargaining power that they leave the company with slim or no profits. In the case of Amazon, the power of its suppliers is very low mainly because of its strong brand name and dominance in the market. The list of Amazon suppliers includes delivery service suppliers such as USPS, FedEx, merchant suppliers etc. According to Kim (2017), Amazon has immense leverage over its suppliers because of its vast market power that some big companies have even shifted their resources to Amazon FBA warehouses to stay competitive.

Amazon has so much power over its suppliers that it even forces them to buy ads on Amazon in order to remain major wholesale partners (Kim 2017).

4.4 Threat of substitutes

According to Johnson et al (2008), substitutes can reduce demand for a particular class of products as customers switch to alternatives. In the case of Amazon, the substitutes are physical stores or traditional brick and mortar retailers. The threat of substitute for Amazon is low considering the fact that the retailer has dominated online retail and is also operating brick and mortar stores (BBC News 2017), giving the US retailer more exposure and brand awareness which increases its dominance and lowers the threat of substitutes. 

4.5 Competitive rivalry

The USA e-commerce retail market is a monopoly with Amazon commanding a market share of 44% by the end of 2017 and expected to capture at least 50% by the end of 2018 (Thomas 2018). According to Thomas (2018), e-Bay is forecast to follow at a distance with 6.6%, Apple with 3.9% and Walmart 3.7%. Amazon has created a monopoly, resulting in closure of some stores and leaving some store with no option but to operate on its platform increasing its dominance and growing its profits.

Amazon’s e-commerce sales in USA are forecast to reach $258.2 billion increasing by 30% from 2017, sales generated from the market place will more than double the retailer’s direct sales in USA by the end of 2018 according to Thomas (2018) and are forecast to be more than 70% of Amazon’s over all business by 2019. Amazon has created such an unhealthy competition pushing most retailers out of the market which has created anti-trust accusations by Trump (Sherman 2018).

5.0 Amazon BCG Matrix 2018

5.1 Stars

Amazon’s Echo has proven to be the e-commerce giant’s star, commanding almost 72% of the US smart speaker market taking the leadership position followed by Google at 18.4% (Kinsella 2018).

Amazon’s market place is also a star. The business contributes approximately $135 billion to Amazon’s own sales and its estimated to grow up to $259 billion by 2020 making it bigger than most countries e-commerce (Smale 2017).

Amazon’s prime is one of the major pillars on Amazon contributing $3.4billion in subscription services revenues in the second quarter of 2018 (Griswold 2018). The total number of subscribers is forecast to increase to 164 million by 2020 and the average annual prescription from $97 to $110, this could add at least $18 billion to Amazon’s revenue (Forbes 2018).

5.2 Cash cows

Amazon’s web service (AWS) is the retailer’s cash cow contributing majority of Amazon’s income. In the fourth quarter of 2014, AWS contributed at least 5% of the Amazon’s revenue, 8.5% in the same quarter of 2017 and 10% across the whole of 2017 (Novet 2018a). Amazon’s Web Service had 62% market share in the fourth quarter of 2017 down from 68% a year earlier (Novet 2018b).  The business’s sales grew by 45% in the fourth quarter of 2017 to $5.11 billion and $17.6billion for the entire year of 2017, exceeding analyst expectations by $4.97billion (Novet 2018a).

5.3 Question marks

Whole foods and Amazon Prime Advertising are the company’s question marks because of their high growth potential. Whole foods contributed $4.4 billion to the retailer’s revenue (Chmielewski 2018). Whole Foods is growing at a high rate and with more investments it has the potential to become the future star. While Amazons core retailing SBU brings in the most revenue and is thus the star, advertising is fast becoming a high growth area. Prime advertising, which involves selling display ads on Amazon, sponsored products and priority product placement in search, is estimated to generate more than $25billion in ad revenues by 2022, which will make this SBU as impactful as cloud computing (Bond 2018b).

5.4 Dogs

There is are few businesses that Jeff Bezos and Amazon have failed to succeed in with the exception of some notable failures in the past including Amazon Fire, the smartphone launched in 2014. Beset with deficiencies including poor design, inadequate distribution and pricing strategy, the Amazon fire was a sure dog.

References

BBC News (2017) “Amazon’s newest Bricks and mortar opens in New York” [Online] at https://www.bbc.com/news/business-40051886

Bond, Shannon (2018b) “Amazon set for Prime Day ad revenue bonanza” Financial Times, New York.

Chambers Sam (2018) “Britain’s Amazon obsession puts retailers at breaking point” Bloomberg [Online] at https://www.bloomberg.com/news/articles/2018-02-09/britain-s-amazon-obsession-pushes-retailers-to-breaking-point

Cox, J., and Musaddique S. (2018) “Death of the British high street? Store closures and job cuts paint grim pictures for 2018” Independent [Online] at https://www.independent.co.uk/news/business/analysis-and-features/uk-high-street-store-closures-retail-job-losses-2018-next-toys-r-us-new-look-maplin-a8270506.html

Chmielewski Dawn C (2018) “Amazon more than doubles first quarter profit thanks to AWS, Whole Foods and subscriptions” Deadline.com [Online]at https://deadline.com/2018/04/amazon-beats-wall-street-estimates-first-quarter-thanks-aws-whole-foods-subscriptions-1202377684/

Forbes (2018) “How much can prime subscriptions add to Amazon’s net revenue” [Online] at https://www.forbes.com/sites/greatspeculations/2018/04/19/how-much-can-prime-subscriptions-add-to-amazons-net-revenues/#207cdeb45b0e

Griswold Alison (2018) “The Apple of Amazon’s eye is Alexa” Quartz [Online] at https://qz.com/1341368/the-apple-of-amazons-eye-is-alexa/

Johnson, G., Scholes, K., and Whittington, R. (2008) “Exploring corporate strategy” 8^th Edition; FT-Prentice Hall

Kim Eugene (2017) “As Amazon’s dominance grows, suppliers are forced to play by its rules” CNBC [Online] at https://www.cnbc.com/2017/12/21/as-amazons-dominance-grows-suppliers-are-forced-to-play-by-its-rules.html

Kinsella Bret (2018) “Amazon Echo maintains large market share lead in US smart speaker use base” Voicebot [Online] at https://voicebot.ai/2018/03/08/amazon-echo-maintains-large-market-share-lead-u-s-smart-speaker-user-base/

Mitchell Toya (2018), Amazon new black haircare shop increases competition in a crowded category - 30th April 2018” Mintel Reports

Novet Jordan (2018a) “Amazon cloud revenue jumps 45% in fourth quarter” CBNC [Online] at https://www.cnbc.com/2018/02/01/aws-earnings-q4-2017.html

Novet Jordan (2018b) “Amazon lost cloud market share to Microsoft in the fourth quarter: KeyBanc” CNBC [Online] at https://www.cnbc.com/2018/01/12/amazon-lost-cloud-market-share-to-microsoft-in-the-fourth-quarter-keybanc.html

Sherman Alex (2018) “Donald Trump’s tweets can’t hurt Amazon, but here is how the government could crack down” CBNC [Online] at https://www.cnbc.com/2018/04/03/trumps-amazon-threats-mostly-empty-but-government-could-crack-down.html

Thomas Lauren (2018) “Watch out, retailers. This is just how big Amazon is becoming” CNBC [Online] at https://www.cnbc.com/2018/07/12/amazon-to-take-almost-50-percent-of-us-e-commerce-market-by-years-end.html

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